Merger between SK Innovation, E&S hinges on investor persuasion
SK E&S' liquefied hydrogen plant in Incheon / Courtesy of SK E&S
SK Group's energy units, SK Innovation and SK E&S, are set to merge, with the boards of both companies expected to finalize the plan during their respective meetings scheduled for this week.
If the merger proceeds as planned, it will create an energy giant with a market valuation likely exceeding 100 trillion won ($72.5 billion), while also injecting capital into SK On, the group's financially struggling battery maker.
However, industry officials said the deal's success will depend on establishing a fair merger ratio and persuading investors with conflicting interests.
According to SK Innovation's regulatory filing, it will hold a board meeting on Wednesday to "discuss various strategies to enhance business competitiveness," adding "details for the merger have not been determined yet." SK E&S board also plans to hold one on the same day.
SK Corp., the group's holding firm and the largest stakeholder of both companies, will reportedly also hold its board meeting on Thursday to discuss the results of Wednesday's meetings. SK Corp. declined to confirm the report.
SK Innovation is serving as an intermediate holding company of SK Group, with a 36.22 percent stake held SK Corp. SK Innovation's portfolio spans refining, petrochemicals and other energy-related businesses, and the company controls nine subsidiaries, including SK On.
SK E&S is an unlisted energy firm focusing on liquefied natural gas and renewable energy, and the group's holding company owns a 90 percent stake in it. The company set a new high in its earnings in 2022 and also posted solid numbers last year — 11.2 trillion won in sales and 1.33 trillion won in operating profit.
The logo of SK On is seen at its EV battery factory in Seosan, South Chungcheong Province, Oct. 19, 2023. Reuters-Yonhap
Given SK Innovation's high debt ratio of 175.8 percent in the first quarter of this year and its scheduled battery business investment worth 16 trillion won, the merger is interpreted as a strategy to use SK E&S' profitability as a source of stabilizing SK Innovation's cash flow and address SK On's operating loss, which stood at 581.8 billion won last year.
"SK E&S' domestic and international LNG operations have been resilient from the market volatility," Meritz Securities analyst Rho Woo-ho said. "If the merger between SK E&S and SK Innovation succeeds, it is expected to improve SK Innovation's net asset value, which would likely result in short- or medium-term benefits for SK On."
The key to a successful merger is persuading other investors.
Private equity KKR holds redeemable convertible preference shares in SK E&S, valued at 3.15 trillion won. These shares give the holder the right to have them redeemed by the issuing company at a predetermined price.
SK Group's headquarters is seen in this undated photo. Korea Times file
If KKR opposes the merger or is dissatisfied with the merger ratio, it could demand that the company redeem the shares for cash. This might force SK E&S to sell its valuable assets, contradicting SK Group's plan to maintain the company as an energy cash cow.
Market watchers assume that the merger will take place by exchanging two SK Innovation shares with one SK E&S share to satisfy KKR with a higher valuation of SK E&S.
This scenario, however, could potentially dilute the value of SK Innovation shares and increase the influence of SK E&S investors in the merged firm, which could eventually trigger a backlash from current SK Innovation shareholders.
On the online stock forum of web portal Naver, SK Innovation investors are uploading postings advocating for a merger ratio favoring SK Innovation, urging others to resist the merger. After SK Corp., the National Pension Service is the second-largest shareholder in SK Innovation.