SK Innovation decided to absorb and merge its subsidiary SK IE Technology (SKIET), which it had listed after a past physical split. It has been seven years since SK Innovation carved out the separator business to create SKIET, and only five years since SKIET listed on the stock market. A company that had raised massive funds at the time of listing on expectations of high growth in the electric vehicle and battery industry will ultimately return to its parent company's fold due to a downturn in business conditions.
SK Innovation(096770) says the decision is intended to secure SKIET's financial stability, reduce business and financial risks, and cut expense to strengthen the business's competitiveness. With SKIET's performance and financial structure having deteriorated significantly amid prolonged sluggish demand for electric vehicles, the judgment is that integrating it into the parent company is more efficient than maintaining a separate entity.
However, in the market, some say the decision is a case that shows the bitter end of "split listing," which has been cited as a key reason for the undervaluation of the domestic stock market (the Korea discount). While the parent company enjoyed the benefit of raising large amounts of capital through split listings during boom times, once the cycle turned down, the losses and damage in the process of reabsorbing the unit back into the parent ended up being shouldered by minority shareholders.
SK Innovation said it convened its board on the 25th and approved a plan to absorb and merge SKIET. The merger ratio is 1 to 0.1174540, allocating 0.117 shares of SK Innovation per one share of SKIET. To allocate new shares to existing SKIET shareholders, SK Innovation plans to issue 4,481,300 new merger shares. This amounts to 2.6% of SK Innovation's total number of shares outstanding.
Shareholders who oppose the merger can exercise appraisal rights to have the company buy back their shares. The appraisal price is 14,620 won. However, investors who purchased shares after the merger announcement or shareholders who expressed consent to the merger cannot exercise appraisal rights.
Behind the decision by the largest shareholder to carry out an absorption-type merger only five years after listing lies the prolonged slump in the electric vehicle sector. SKIET produces separators, an essential material for secondary batteries, but weak performance has persisted due to the fallout from slowing electric vehicle demand (the chasm).
Turning to a loss in 2023, SKIET posted an annual net loss of more than 200 billion won last year, and in the first half of this year, disposal losses from the sale of a Chinese subsidiary and other factors pushed the net loss to 1.3 trillion won. The liability ratio also exceeded 150%.
In particular, if SKIET's financial instability continues, concerns that the risk could spill over to SK On are seen as the decisive trigger for this decision. SK Innovation said, "If financial instability causes disruptions in SKIET's separator supply, there could be disruptions in SK On's battery production as well," adding, "After SK Innovation's merger with SKIET, the production and supply system for separators will be operated effectively based on a stable financial foundation."
The problem is that ordinary shareholders who invested believing in SKIET's growth potential are left with massive losses.
In Apr. 2019, SK Innovation physically split off its separator business institutional sector to establish SKIET. Two years later, the company listed SKIET on the main board.
At the time, as the electric vehicle market took off, expectations for growth in the battery business were high, and SKIET's listing was a blockbuster. The subscription competition ratio hit an all-time high then, and the offering price was set at the top end of the company's desired range, 105,000 won.
Notably, 60% of the shares offered at the time of listing were existing shares sold by current holders. As a result, the largest shareholder SK Innovation effectively passed shares to ordinary shareholders at the highest price. Due to the secondary sale of existing shares, SK Innovation's equity stake in SKIET fell from 90% to 60%, and SK Innovation pocketed 1.35 trillion won in cash.
However, after SKIET entered the market at an offering price of 105,000 won, the share price jumped to 210,000 won right after listing and then immediately reversed into a downtrend. A year after listing, the share price had halved, and it has since plunged to the 15,000-won range, about 10% of the offering price.
According to shareholder analyses by major securities firms such as Samsung Securities and NH Investment & Securities, more than 90% of SKIET's retail investors are in the red, with an average return of minus (-)78%. As of the end of June this year, the employee stock ownership association held about 524,000 shares (0.64%). Existing shareholders will receive allocations of SK Innovation shares, but the merger ratio reflects the plunge in the share price as is.