SK Innovation's Merger with SK E&S: Bad Timing for SK Innovation and Higher Risks from RCPS

• On 17 July, SK Innovation (096770 KS) officially announced a merger with SK E&S. The merger ratio between SK Innovation and SK E&S has been set at 1 to 1.1917417.

• We believe this is the wrong timing for this merger from SK Innovation's point of view. SK Innovation is trading at near three year lows.

• This merger is likely to generate backlash from KKR which holds SK E&S redeemable convertible preferred stock (RCPS) worth 3.1 trillion won.

On 17 July, SK Innovation (096770 KS) officially announced a merger with SK E&S. The merger ratio between SK Innovation and SK E&S has been set at 1 to 1.1917417. SK Innovation will issue 49,769,267 new shares to SK E&S's shareholder, SK Inc as part of this merger. This transaction is expected to increase SK Inc.'s stake in SK Innovation from 36.22% to about 56%.

Unlisted SK E&S operates mostly city gas utilities and liquefied natural gas (LNG) power generation businesses. In addition, SK On announced that it will merge with SK Trading International and SK Enterm to improve raw material purchasing efficiency, expand trading, and improve SK On's profitability.

The shareholders of both companies are expected to vote for a final approval at a meeting scheduled for 27 August. Although the merger plan between SK Innovation and SK E&S has been approved by the board of directors, they still need to persuade shareholders who are opposed to the merger ratio. If the proposal is approved, the merged company will be officially launched on 1 November. The newly merged SK Innovation shares will start trading on 20 November. According to the SK Group, this merger is expected to create meaningful synergies, improve financial and profit structures, and secure growth momentum.

The combined SK Innovation and SK E&S entity will become one of the largest energy companies in Korea which will be divided into eight main business units including petrochemicals, liquefied natural gas (LNG), city gas, electric power, renewable energy, batteries, energy storage systems (ESS), and hydrogen. The merged company will have assets of about 100 trillion won and sales of 90 trillion won.

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Merger Price Calculation for SK Innovation

The merger price for SK Innovation has been determined at 112,396 won, which is based on the average price of last one month, last one week, and closing price on 16 July.

• Merger price of SK Innovation - 112,396 won per share

  • 1 month trading volume weighted arithmetic average closing price (17 June 2024- 16 July 2024) - 114,438 won per share

  • 1 month trading volume weighted arithmetic average closing price (10 July 2024 - 16 July 2024) - 109,451 won per share

  • Closing price (16 July 2024) - 113,300 won per share

• The net asset value of SK Innovation was 245,405 won per share. The merger price was based on the average of the recent market prices rather than on its net asset value. The net asset value was calculated as follows:

a) Most recent year (2023) non-consolidated equity - 18.2 trillion won

b) Adjusted items - 5.5 trillion won

c) Adjusted equity (a+b) - 23.7 trillion won

d) Adjusted equity (common shares portion) - 23.5 billion won

e) Outstanding shares - 95.7 million shares

f) Net asset value (d/e) - 245,405 won

SK Innovation's share price trend (Source: Google finance)