SK Innovation announced on the 30th that it will merge its subsidiary SK On with SK Enmove and raise substantial funds.
SK On will absorb SK Enmove, and the merged corporation will officially launch on Nov. 1. Additionally, SK Innovation plans to raise a total of 8 trillion won this year.
Next is a Q&A session with SK Innovation's management.
Since last year, SK Innovation's business restructuring has been actively underway. I am curious about the mid-to-long-term vision and growth strategy.
"SK Innovation plans to foster three future growth pillars: ▲ domestic liquefied natural gas (LNG) business and overseas expansion based on it ▲ energy solutions business ▲ battery business. The vision is to become a total energy company in the electrification era. The goal is to pursue operational improvement (OI) from the existing petrochemical sector to the LNG power industry. The plan is to maximize the profitability of these businesses and continuously create a stable revenue structure.
The global LNG power project is currently being conducted in Southeast Asian countries. News is expected to be released soon. The energy solutions business is currently considering a differentiated competitive strategy by integrating various energy-related capabilities that SK Innovation possesses to offer customized package solutions. The battery business plans to enhance manufacturing capabilities and technology cost competitiveness to secure profitability and growth potential. To achieve this vision, portfolio rebalancing will be carried out."
I am curious about the breakeven point (BEP) achievement timeline for the battery division.
"Over the past two years, we have worked hard on cost reduction, productivity enhancement, and yield improvement. However, as demand for electric vehicles has grown slowly, we have not been able to achieve breakeven on an annual basis. We are taking this time to solidify our fundamentals and are conducting comprehensive profitability improvement activities to innovate our expense structure.
In the first half of the year, we expect to see improved profitability centered around the U.S. Starting this year, we anticipate the scale of earnings before interest, taxes, depreciation, and amortization (EBITDA) to continue to grow, eventually achieving operating profits and breakeven point sequentially. I will share detailed insights on the 31st when the second-quarter results are announced."
What are SK Enmove's plans for its initial public offering (IPO)?
"The merged corporation of SK On and SK Enmove will launch as of Nov. 1. Through this portfolio rebalancing, all existing contracts with financial investors (FI) will be nullified. This means that the obligation for IPO also disappears. I think now is the time to solidify our foundation. At this point, there are no IPO plans for the merged corporation. We will consider various options depending on future circumstances. In that process, we will prioritize the interests and value enhancement of shareholders."
Are there additional plans for business restructuring or asset sales?
"Over the past five years, SK Innovation's corporate value and stock prices have continued to decline. The decline in SK Innovation's profitability has been the cause. I believe that improving profitability and restructuring are essential tasks to enhance SK Innovation's corporate value. There is a need for business structure restructuring, asset efficiency, and the sale of non-core assets. Portfolio rebalancing is not an option but a necessity. Various rebalancing efforts are planned to be pursued in the future, but nothing is finalized yet."
I am curious about how the merger ratio of SK On and SK Enmove will be determined.
"The merger ratio for SK On and SK Enmove is 1 to 1.6616742. It was calculated fairly using the discounted cash flow (DCF) model by the accounting firm."
Will SK hold a negative impact on stock prices as it participates in SK Innovation's third-party capital increase?
"This capital reinforcement is 5 trillion won, with about 3.9 trillion won from PRS. Typically, when conducting a third-party capital increase, stock price volatility increases. It would be helpful to view the contract as a measure to absorb stock price volatility with the major shareholder to prevent the rights of other shareholders from being compromised. The stock price may rise as a strategy to enhance corporate value. It should also be seen that the major shareholder has designed it to benefit from PRS."
Will the sale of the LNG division undermine E&S's competitiveness?
"The LNG business is a heavy industry requiring large-scale facilities except for trading. When a large investment is made initially, about 70% of the financing is raised based on future performance. It is a structure where stable business serves as collateral. Depending on how business is conducted, it can generate high profits, but it also has a characteristic of high debt ratio, making the financial structure vulnerable.
Once we enter a stabilization phase, we have continuously employed strategies to enhance financial structures by verifying the stability and profitability of the business, and then liquidating some equity. There was a precedent of liquidating 49% of the equity of the Paju LNG power plant a few years ago. Currently, several power plants held by E&S are operating commercially. As we have verified stability and profitability sufficiently, we are considering liquidating some equity to improve our financial structure.
We plan to proceed with liquidity in a manner that does not undermine the competitiveness of the energy value chain. It is absolutely not about liquidating the LNG value chain. It is about liquidating equity in non-operating assets and idle assets from the perspective of asset efficiency. It is unrelated to business competitiveness. Even if we liquidate, we have long-term usage rights of over 20 years. The LNG business is SK Innovation's future growth driver."
Does SK's participation in SK Innovation's capital reinforcement pose a negative impact on stock prices?
"SK Innovation is a core subsidiary of SK. I see the growth of SK Innovation as very important for SK. SK Innovation accounts for 30% of the net worth that SK owns. In terms of consolidated revenue, it is 60%. Analyzing stock prices shows a correlation of about 71%. Enhancing SK Innovation's corporate value is directly linked to SK."
I am curious about the background of pursuing equity purchases from FIs instead of SK On's IPO.
"The situation when attracting FI funds then and now is very different. When SK On attracted FI funds in 2020, there were many positive outlooks for the electric vehicle market. The situation has changed now. I believe it is more appropriate to build a mid-to-long-term growth foundation and strengthen financial soundness rather than hastily pursuing an IPO for SK On.
In that process, the contracts made with FIs became a constraint on portfolio rebalancing. Therefore, we judged that it would be more appropriate to dissolve contracts with FIs and create integration synergies through portfolio rebalancing. We have concluded that expediting the equity purchase from FIs is economically more advantageous."
Is there a possibility that E&S will also pursue equity purchases from KKR similarly to SK On?
"The FI equity of SK On and KKR's redeemable convertible preferred shares (RCPS) are very different in nature and circumstances. SK On should have gone for an IPO, while KKR's RCPS does not have such conditions. There is enough time until the redemption schedule in 2027-2028. The method of redemption will be reviewed in due course."
The petrochemical industry is still sluggish; what are the plans for SK Geo Centric and Incheon Petrochemical?
"It is currently challenging to generate profitability in the petrochemical business. Our focus is on operational improvement activities, including expense reduction, productivity enhancement, and revenue increase. SK Geo Centric is progressing in the recycling plastic business and has increased fixed costs, and we are pursuing several activities to reduce fixed costs, including the sale of recycling-related assets. We will participate in the government's restructuring of the petrochemical business where there are aspects to discuss with related companies."