SK Telecom gets stable rating despite botched M&A bid

By Kim Yoo-chul

Despite disapproval by the Fair Trade Commission (FTC) concerning SK Telecom’s proposed takeover of CJ HelloVision (CJH), a leading credit ratings agency said the disapproval is highly unlikely to impact the telecom’s financial soundness.

“We expect SK Telecom to maintain its overall credit quality following the Korean regulator’s disapproval of the company’s proposed merger with CJH,” S&P Global Ratings said in a statement, Monday.

“We are affirming our A- long-term corporate credit on SK Telecom and the A- long-term issue rating on the company’s senior unsecured notes,” S&P said, adding that its decision to maintain the “stable outlook” on the country’s top mobile carrier is mostly due to SK Telecom’s strong market position.

“SK Telecom’s leading market position should allow it to continue to generate stable operating cash flows and maintain strong debt-servicing capacity over the next two years,” said the ratings agency.

S&P expects SK Telecom’s financial metrics to be modestly better than earlier forecasted mainly because there will be no cash outflows or debt increases related to the merger.

S&P added it could raise its ratings on SK Telecom if the top telecom firm reduces financial risks, while keeping profitability stable and holding onto its prudent financial policy.

SK Telecom had planned to acquire an entire stake in CJH, which is owned by CJ O Shopping, with an investment of up to 1 trillion won.

This acquisition plan was a part of SK Telecom’s ambitious initiative to cut its heavy reliance on the saturated local telecom market and expand its presence in the media platform business, which the mobile carrier has identified as one of its next cash generators.

But the acquisition plan drew much criticism by SK’s two chief local rivals ― KT and LG Uplus ― as they claimed the takeover plan would have harmed fair market competition. CJH is the country’s top pay-TV operator, operating more than 20 regional broadcasting services.

After thorough review, the FTC, the country’s top antitrust regulator, disapproved the deal saying the SK-CJH acquisition plan, if realized, could limit fair competition in Korea's pay-TV market.

The Ministry of Science, ICT and Future Planning (MSIP) and the Korea Communications Commission (KCC), the other two government agencies which have the authority to approve or block the deal, are yet to endorse the disapproval.

“However, we believe it is highly likely that the acquisition plan will be canceled given the regulatory disapproval by the FTC,” said S&P in the statement.

Given this situation, S&P mentioned that the disapproval will constrain the enhancement in SK’s competitive position especially in the media and pay-TV business.

“This is because the company will find it difficult to grow its media and pay-TV business as fast as it had originally expected,” said the ratings agency.

It added that it may cut its ratings on SK Telecom if it sees operating profitability weaken substantially.

“Also, the ratings could come under downward pressure if SK Telecom materially increases its ownership in SK hynix or makes other significant investments in noncore businesses,” it added.

On a related note, S&P left its ratings on SK Broadband (SKB), affiliated with SK Telecom, unchanged with the current A-.

“We believe SKB will continue to be a core subsidiary of SK Telecom, given SKB’s critical role in the group's growth strategy and the accelerating convergence of media and telecom businesses in Korea,” S&P said in a separate statement.

“We are affirming the A- long-term corporate credit rating on SKB and the A- long-term issue rating on the company’s senior unsecured notes. The stable outlook on SKB reflects well SK Telecom.”

SKB’s internet-based pay-TV business is one of SK Telecom’s fastest-growing businesses.

“This trend will continue for the next two years. SKB enables SK Telecom to offer various bundled products to compete with KT and LG Uplus.”