Impact on SK Inc Post Record Divorce Ruling for SK Group Chairman Chey Tae-Won

• We discuss the outlook for the likely impact on SK Inc post record divorce ruling for the SK Group Chairman Chey Tae-Won and his estranged wife Roh So-Young.

• Last week, a South Korean appellate court ordered Chairman Chey to pay 1.38 trillion won to Roh. Chey is appealing this case and the Supreme Court's ruling is still pending.

• It is in the best interest of SK Inc to raise the overall value of the company since the payment of the divorce is mostly based in cash.

In this insight, we discuss the outlook for the likely impact on SK Inc (034730 KS) post record divorce ruling for the SK Group Chairman Chey Tae-Won and his estranged wife Roh So-Young. Last week, an appellate court in South Korea ordered Chairman Chey Tae-Won to pay 1.38 trillion won (US$1 billion) to Roh So-Young.

If Chey is forced to pay this amount, it would be the largest ever divorce payment in South Korea's history. Chey is appealing this case and the Supreme Court's ruling is still pending. The Supreme Court's decision could take additional two to three years. Nearly 7 years have already passed since Roh So-Young first initiated the divorce process.

The appellate court ruled that the combined net assets of Chey and Roh were worth about 4 trillion won and that this amount be divided 65% for Chey and 35% for Roh. The court also ordered Chey to pay the amount to Roh is cash. If Chey is forced to pay the entire 1.38 trillion won in cash to Roh, it is expected that Chey may need to sell his holdings in SK Inc, as well as real estate, loans, cash, and stakes in privately held SK Siltron. Chairman Chey has already taken out around 1 trillion won of loans using his stake in SK Inc as collateral.

The amount that Chey needs to pay to Roh has been raised considerably from an earlier lower court ruling of 66.5 billion won. The court increased the amount after considering the contributions Roh So-young and her father (former South Korean President Roh Tae-Woo) made to Chey's success in business.

Conclusion First

Nearly 7 years have passed since Roh So-Young first initiated the divorce process with SK Chairman Chey Tae-Won. The appellate court has ruled the largest ever divorce payment in favor of Roh So-Young as it has decided that Chairman Chey needs to pay nearly 1.38 trillion won to Roh.

In our view, the Supreme Court is likely to reduce the overall divorce payment. We expect the Supreme Court's decision to be for Chairman Chey to pay about 50%-75% of the 1.38 trillion won that the appellate court has ruled in favor of Roh. At the low end of this range (50% of 1.38 trillion won or 0.69 trillion won), this would not materially impact SK Group's shareholdings as Chairman Chey would not need to divest his holdings in SK Inc. However, at the high end of the our divorce payment range (75% of 1.38 trillion won or 1.04 trillion won), this would likely require Chairman Chey to take out a higher loans using his stake in SK Inc as collateral.

Now, given that it will take another two to three years for the Supreme Court to make final ruling on this divorce case, it is in the best interest of SK Inc to raise the overall value of the company since the payment of the divorce is mostly based in cash.

All in all, it is in the best interest for SK Inc to improve its corporate governance through greater returns to shareholders (including higher dividends and share cancellations) as they are likely to help Chairman Chey to better meet the divorce payment requirements.

Photo by Yohan Cho on Unsplash