SKT to Be Divided into 2 Companies
The author is an analyst of KB Securities. He can be reached at joonsop.analyst@kbfg.com. -- Ed.
Plans for governance revamp announced
— At its town hall meeting on April 14, SK telecom (SKT) announced plans to revamp its governance structure.
— According to SKT, the governance restructuring would take the form of a spin-off, whereby SKT will be divided into two companies: (1) an MNO entity (operating entity; tentatively named “AI & Digital Infra Company”) responsible for the firm's traditional business that will have SK broadband under its roof; and (2) an intermediate holding company (tentatively named “ICT Investment Company”) incorporating new businesses (i.e., semiconductor, e-commerce) that will have SK hynix, 11street, and ADT Caps under its roof.
— Meanwhile, according to Chosun Ilbo (Apr 14), SKT CEO Park Jung-ho has said that the restructuring will not for the time being involve a merger between the intermediate holding company ICT Investment Company and its parent SK holdings (KS.034730). In the absence of a such a merger, SK hynix, subsidiary to ICT Investment Company, would remain a sub-subsidiary of SK holdings; M&A activity should continue to be constrained under the Fair Trade Act. (A sub-subsidiary of a holding company is, in principle, prohibited from acquiring another company, except in the case where the holding company would acquire full ownership in the target company.)
— According to regulatory filing by the company, the details (e.g., spin-off ratios, share cancellations) are to be determined through a board meeting before end-1H21.
Whether this may lead to higher valuations for ICT subsidiaries to be key
— We believe SKT’s latest move has come about as its ICT subsidiaries have not been receiving due valuation. The company’s ICT subsidiaries continue to be overshadowed by its telecom business, whose profits still account for an overwhelming proportion of the company’s earnings, despite the business offering limited growth potential. Meanwhile, subsidiaries with high growth potential (SK Hynix, T map, 11street) are not being appropriately valued by the market.
Adoption of holding company structure before year-end to be a positive
— By adopting an intermediate holding company structure by year-end, SKT would be able to avoid the application of new fair trade rules (revised at end-2020; to become effective from 2022); in the event ICT Investment Company comes into being in 2022 or later, it would have to acquire an additional 10% stake in SK hynix (currently at 20.1%). The revised rules stipulate that a holding company own at least 30% in a listed subsidiary or sub-subsidiary, and at least 50% in an unlisted entity (vs. 20% and 40%, respectively, prior to revision).
