Boards of SK Innovation, SK E&S to discuss merger Wednesday

SK Innovation and SK E&S will discuss a merger to create an energy firm with a market capitalization of more than 100 trillion won.

SK Group office in Jung District, central Seoul [NEWS1]

A merger of SK Innovation and SK E&S, expected to create an energy firm with an asset value of more than 100 trillion won ($72.5 billion), will be discussed at the firms' respective board meetings on Wednesday.

“We are considering various plans, such as a merger, to fortify the company's business competitiveness,” SK Innovation said in an electronic disclosure on Friday. Discussions regarding such a merger “will take place at the board meeting on the 17th, but nothing in detail has been decided yet,” the company said.

SK Innovation — 36.2 percent of which is controlled by SK Inc., the holding company of SK Group — which has nine energy-related subsidiaries under its wing, has assets valued at 86 trillion won. SK E&S, 90 percent controlled by SK Inc., specializes in liquefied natural gas and renewable energy. The unlisted company's assets are estimated to be 19 trillion won.

The merger deal between the two companies stands in the center of SK Group's restructuring plan focused on shedding unprofitable business and integrating overlapping ones. It would aim to solve financial problems at SK On, an electric vehicle battery subsidiary of SK Innovation.

SK E&S has served as a cash cow for the group, posting an operating profit of 1.3 trillion won last year while SK On logged 581.8 billion won of operating loss due to slowing demand for EVs. SK Innovation's profit was 1.9 trillion won over the same period.

The deal will hinge both on establishing a fair merger ratio and currying investor support. SK E&S will need to convince U.S. investment firm Kohlberg Kravis Roberts (KKR), which has invested more than 3 trillion won in the energy subsidiary since 2021 through redeemable convertible preference shares. KKR can demand that the company redeem its shares if it opposes the merger.

A merger ratio that is deemed favorable to SK E&S, however, could trigger backlash from SK Innovation's minority shareholders.

Industry watchers speculate that the ratio will settle in favor of SK E&S due to the lower valuation of SK Innovation's shares at the moment. The latter's price-to-book ratio has fallen below 0.5, meaning that its current market value is lower than its book value.

A merger ratio favorable to SK E&S would give SK Inc. greater control of the newly combined firm.

“Even if the merger is approved by the board, if it cannot pass the general shareholder meeting, it's all worthless,” said one industry insider.

“We'll have to see about the merger ratio, because it has to take both sides' shareholders' opinions into consideration.”

BY CHOI HYUN-JU, JIN EUN-SOO [jin.eunsoo@joongang.co.kr]