Proposed Merger Between Rebellions and Sapeon - To Challenge Nvidia

• On 12 June, SK Telecom (017670 KS) confirmed that its affiliate Sapeon plans to merge with its competitor Rebellions by end of this year.

• Sapeon and Rebellions' largest global competitor is Nvidia. A key aim of the merger is to challenge Nvidia and try to take away its global dominance in AI chips.

• If the combined Sapeon and Rebellion can take away just 1% market share resulting in 1% of Nvidia's market cap, this would suggest valuation of US$31 billion.

Conclusion First

On 12 June, SK Telecom (017670 KS) confirmed that its affiliate Sapeon plans to merge with its competitor Rebellions by end of this year. The two companies mentioned that they are aiming to sign the final merger contract sometime in 3Q 2024 after due diligence and launch a merged entity by the end of 2024. Both Rebellion and Sapeon are artificial intelligence based semiconductor chip companies. Post this merger, SK Telecom is expected to become the largest shareholder. The exact merger ratio has yet to be determined. Currently, SK Telecom has a 62.5% stake in Sapeon (pre-merger).

The management rights of the merged entity is expected to be held by Rebellions until listing. Park Seong-hyun, CEO of Rebellion, will also serve as CEO of the merged corporation. The corporate value of the combined company after listing is expected to be about 2 trillion won (US$1.5 billion) or more. Rebellions' corporate value was about 800 billion won in early 2024. Sapeon's corporate value was worth about 500 billion won in September 2023.

Sapeon and Rebellions' largest global competitor is NVIDIA Corp (NVDA US). A key aim of this proposed merger is to compete more effectively against Nvidia and try to take away its global dominance in AI chips. Nividia currently has a market cap of US$3.1 trillion (4,200 trillion won). If the combined Sapeon and Rebellion can take away just 1% market share resulting in 1% of Nvidia's market cap, this would suggest valuation of US$31 billion, which would catapult the combined entity to among the top 10 companies in Korea.

All in all, there is a high amount of uncertainty on whether or not Sapeon and Rebellions could compete effectively against Nvidia. However, many investors would be willing to take extra risk in the combined Sapeon and Rebellions since the combined entity could be one of the most promising companies that could eventually take away market share from Nvidia for high performance AI chips.

With regards to the impact on SK Telecom, given the uncertainty in the exact merger ratio, we do not yet know how much SK Telecom will own post merger. However, SK Telecom/SK Group could own at least 30% stake in the merged Sapeon and Rebellions, which could be valued at much higher levels than 2 trillion won in 2025. In this respect, this proposed merger of Sapeon and Rebellions is likely to have a positive impact on SK Telecom.

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Company Background (Rebellions)

Established in 2020, Rebellions is a leading AI based fabless startup in Korea. In February 2023, Rebellions launched a new artificial intelligence chip, challenging the global leader NVIDIA Corp (NVDA US) in the hardware that powers AI technologies. Rebellions ATOM chip is designed to excel operating computer vision and chatbot AI applications. According to the company, its ATOM chip targets specific tasks, allowing the chip to consume only about 20% of the power of an Nvidia A100 chip on those tasks. The company's ATOM AI chips are designed by Rebellions and manufactured by Samsung Electronics (005930 KS).