SK Innovation and SK E&S to Discuss a Potential Merger on 17 July

• SK Innovation (096770 KS) and SK E&S plan to hold a board meeting on 17 July to discuss the potential merger between the two companies.

• If this merger is successful, it would create the eighth largest company in Korea with a combined assets of 106 trillion won (US$77 billion).

• Although the merger ratio is not yet available, we believe that this potential merger could potentially benefit SK E&S and SK Inc but could be negative on SK Innovation.

Photo by Kay Mayer on Unsplash

Conclusion First

SK Innovation (096770 KS) and SK E&S plan to hold a board meeting on 17 July to discuss the potentialmerger between the two companies including how to strengthen its main businesses including energy, batteries, EV charging, and hydrogen.

The biggest uncertainty remains the merger ratio. Given that SK E&S is a private company, the merger ratio remains even a bigger issue. From SK Innovation's shareholders' point of view, this would be a terrible time to conduct a merger since its share price is down 63% since its highs in February 2021. Many investors have been concerned about this which has resulted in further downward slide of SK Innovation's share price.

It also appears that the SK Group may be trying to accelerate this merger prior to the Korean government instituting tougher regulatory measures through the Corporate Value Up program.

On the bright side, if the merger is successful, it would create the eighth largest company in Korea with a combined assets of 106 trillion won (US$77 billion). Initially, this merger was expected to be announced on 28 to 29 June but since then, it has been delayed.

SK E&S generates more than 1 trillion won in cash annually through its LNG power generation business. This is expected to reduce the financial burden suffered by SK On and its parent company, SK Innovation. Due to the massive investments on EV batteries, SK On has been generated continued deficit since its launch in October 2021.

Last year, SK On recorded sales of 12.9 trillion won and an operating loss of 581.8 billion won. Its operating loss ballooned to 331.5 billion won in 1Q 2024. SK On's borrowings, which were 4.5 trillion won at the time of launch, soared to 19 trillion won. SK On plans to spend 7.5 trillion won in capex in 2024.

Although the merger ratio is not yet available, we believe that this potential merger could potentially benefit SK E&S but it is likely to be negative on SK Innovation. Given that this will likely be a stock swap based merger, it would be better for SK Innovation to wait until its share price reaches higher levels. However, at this point, the higher likely scenario is for the SK Group to go ahead with this merger, rather than wait for SK Innovation's share price to reach higher levels.