Korea/Asia, Events, IPOs, Douglas Research Advisory

Douglas Kim

Korea/Asia, Events, IPOs

Equity Bottom-Up

<div class="content-highlight">
<p>In this insight, we provide an updated NAV valuation analysis of <a href="https://www.smartkarma.com/entities/sk-holdings-co-ltd" target="_blank" data-smartkarma-citation="entities:393:1" rel="noopener">SK Inc (034730 KS)</a>. Our updated base case valuation of SK Inc is 381,838 won per share, representing 45.5% higher than current share price.</p>
<p>In the next 12 months, we believe there is likely to be a greater emphasis on three of the unlisted companies of SK Inc including<strong> SK E&amp;S, SK Pharmteco, and SK Siltron</strong> which will increasingly be considered as potential IPO candidates.</p>
</div><ul>
<li>
<strong>SK E&amp;S</strong> is a private company that is 90% owned by <a href="https://www.smartkarma.com/entities/sk-holdings-co-ltd" target="_blank" data-smartkarma-citation="entities:393:1" rel="noopener">SK Inc (034730 KS)</a>. In early September, SK E&amp;S provided a detailed plan to aggressively expand its hydrogen, LNG, and renewable operations by 2025.</li>
<li>
<a href="https://www.ezyeconomy.com/news/articleView.html?idxno=111825" target="_blank" rel="noopener">SK Pharmteco's</a> sales increased form 110 billion won in 2017 to 710 billion won in 2020. As of July 2021, the local media mentioned that the value of SK Pharmteco could be nearly 2 trillion won but this valuation could rise to nearly 10 trillion in two to three years if the company continues to make strong progress in the CMO sector.</li>
<li>
<a href="https://www.businesspost.co.kr/BP?command=article_view&amp;num=251332" target="_blank" rel="noopener"><strong>SK Siltron</strong></a> is another private company owned SK Inc that is seriously being considered for an IPO. In September 2021, the local media mentioned that SK Siltron could be valued at about 4 to 5 trillion won. </li>
</ul>


In this insight, we provide an updated NAV valuation analysis of SK Inc (034730 KS). Our updated base case valuation of SK Inc is 381,838 won per share, representing 45.5% higher than current share price.
In the next 12 months, we believe there is likely to be a greater emphasis on three of the unlisted companies of SK Inc including SK E&amp;S, SK Pharmteco, and SK Siltron which will increasingly be considered as potential IPO candidates.


SK E&amp;S is a private company that is 90% owned by SK Inc (034730 KS). In early September, SK E&amp;S provided a detailed plan to aggressively expand its hydrogen, LNG, and renewable operations by 2025.

SK Pharmteco's sales increased form 110 billion won in 2017 to 710 billion won in 2020. As of July 2021, the local media mentioned that the value of SK Pharmteco could be nearly 2 trillion won but this valuation could rise to nearly 10 trillion in two to three years if the company continues to make strong progress in the CMO sector.

SK Siltron is another private company owned SK Inc that is seriously being considered for an IPO. In September 2021, the local media mentioned that SK Siltron could be valued at about 4 to 5 trillion won. 


SK Inc - SoTP Valuation Analysis and 3 Key Catalysts (SK E&S, SK Pharmteco, & SK Siltron)

Korea / Special Situations, Clepsydra Capital

Sanghyun Park

Korea / Special Situations

Korea / Special Sits, Pairs, Index Rebalancing

Clepsydra Capital

Investigate special situations, pairs, and index rebalancing trades in Korea.

Event-Driven

<p>SKC is up close to 8% this morning. Today's share price rise is believed to be due to the ambitious plan to transform itself into a mobility material business by investing ₩5T by 2025. Through this, SKC plans to achieve a market cap of ₩30T by 2025.</p><p>Specifically, SKC announced plans to start various secondary battery material businesses, such as silicon anode materials and high nickel cathode materials, in addition to the expansion of its copper foil business.</p><div class="content-highlight"><p><strong>SKC has set a goal to increase the mobility material unit EBITDA from the current ₩380B to ₩2.5T by 2025, accounting for 80% of the total EBITDA.</strong></p></div><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/232/008/original/1.png?1632706939" class="editor-image img-responsive" data-smartkarma-image-id="232008"></figure></section><div class="content-caption">(Source: SKC)</div><p>There seems to be no disagreement as to the fact that these are new businesses that are essential for SKC's growth.</p><div class="content-highlight"><p><strong>However, what the market is really interested in is how SKC will raise this ₩5T.</strong></p></div><p>What SKC says on the surface is that it plans to secure it through strategic financing with financial partners, internal cash and asset optimization, etc. Well, isn't this wording too vague?</p><p>However, SKC presented three fairly specific guidelines along with such vague wording.</p><ol>
<li><strong>Debt ratio: 150~200%</strong></li>
<li><strong>Net Debt-to-EBITDA ratio: less than 4x</strong></li>
<li><strong>Protection of stakeholder interests (well, I do not fully understand what this means.)</strong></li>
</ol><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/232/009/original/2.png?1632707692" class="editor-image img-responsive" data-smartkarma-image-id="232009"></figure></section><div class="content-caption">(Source: SKC)</div><p>First, the current level meets the guideline of less than 200%. As of the first half of this year, SKC's debt-to-equity ratio was 182%. It is worse than the 130% debt ratio maintained before 2019, but considering the current cash flow level, it is difficult to see it as dangerous.</p><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/232/010/original/3.png?1632708315" class="editor-image img-responsive" data-smartkarma-image-id="232010"></figure></section><div class="content-caption">(Source: FnGuide)</div><p>ND/EBITDA stood at 5.6x at the end of last year. However, by the end of this year, this ratio is expected to drop to less than 4x. It is because SKC's EBITDA is growing at a reasonably rapid pace. EBITDA increased from ₩300B in 2017 to ₩380B last year and is expected to reach more than ₩600B this year.</p><table class="table table-striped">
<colgroup>
<col width="100">
<col width="100">
<col width="100">
<col width="100">
<col width="100">
<col width="100">
</colgroup>
<tbody>
<tr>
<td data-sheets-value='{"1":2,"2":"Consolidated"}'>Consolidated</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":43070}' data-sheets-numberformat='{"1":5,"2":"yyyy/m","3":1}'>2017</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":43435}' data-sheets-numberformat='{"1":5,"2":"yyyy/m","3":1}'>2018</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":43800}' data-sheets-numberformat='{"1":5,"2":"yyyy/m","3":1}'>2019</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":44166}' data-sheets-numberformat='{"1":5,"2":"yyyy/m","3":1}'>2020</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":44348}' data-sheets-numberformat='{"1":5,"2":"yyyy/mm","3":1}'>2021E (annualized based on 1H21)</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Net-debt"}'>Net-debt</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":1238.4}' data-sheets-numberformat='{"1":2,"2":"₩#,##0.0B","3":1}'>₩1,238.4B</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":1295.3}' data-sheets-numberformat='{"1":2,"2":"₩#,##0.0B","3":1}'>₩1,295.3B</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":1595.6}' data-sheets-numberformat='{"1":2,"2":"₩#,##0.0B","3":1}'>₩1,595.6B</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":2149.7}' data-sheets-numberformat='{"1":2,"2":"₩#,##0.0B","3":1}'>₩2,149.7B</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":2410.1}' data-sheets-numberformat='{"1":2,"2":"₩#,##0.0B","3":1}'>₩2,410.1B</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"EBITDA"}'>EBITDA</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":298.1}' data-sheets-numberformat='{"1":2,"2":"₩#,##0.0B","3":1}'>₩298.1B</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":328}' data-sheets-numberformat='{"1":2,"2":"₩#,##0.0B","3":1}'>₩328.0B</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":283.1}' data-sheets-numberformat='{"1":2,"2":"₩#,##0.0B","3":1}'>₩283.1B</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":386.6}' data-sheets-numberformat='{"1":2,"2":"₩#,##0.0B","3":1}'>₩386.6B</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":638.8}' data-sheets-numberformat='{"1":2,"2":"₩#,##0.0B","3":1}'>₩638.8B</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"ND/EBITDA"}'><strong>ND/EBITDA</strong></td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":4.154310634015431}' data-sheets-numberformat='{"1":2,"2":"#,##0.00x","3":1}' data-sheets-formula="=R[-2]C[0]/R[-1]C[0]"><strong>4.15x</strong></td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":3.949085365853658}' data-sheets-numberformat='{"1":2,"2":"#,##0.00x","3":1}' data-sheets-formula="=R[-2]C[0]/R[-1]C[0]"><strong>3.95x</strong></td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":5.63617096432356}' data-sheets-numberformat='{"1":2,"2":"#,##0.00x","3":1}' data-sheets-formula="=R[-2]C[0]/R[-1]C[0]"><strong>5.64x</strong></td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":5.560527677185721}' data-sheets-numberformat='{"1":2,"2":"#,##0.00x","3":1}' data-sheets-formula="=R[-2]C[0]/R[-1]C[0]"><strong>5.56x</strong></td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":3.772855353788353}' data-sheets-numberformat='{"1":2,"2":"#,##0.00x","3":1}' data-sheets-formula="=R[-2]C[0]/R[-1]C[0]"><strong>3.77x</strong></td>
</tr>
<tr><td colspan="6" rowspan="1" data-sheets-value='{"1":2,"2":"Source: FnGuide"}'>Source: FnGuide</td></tr>
</tbody>
</table>

SKC is up close to 8% this morning. Today's share price rise is believed to be due to the ambitious plan to transform itself into a mobility material business by investing ₩5T by 2025. Through this, SKC plans to achieve a market cap of ₩30T by 2025.Specifically, SKC announced plans to start various secondary battery material businesses, such as silicon anode materials and high nickel cathode materials, in addition to the expansion of its copper foil business.SKC has set a goal to increase the mobility material unit EBITDA from the current ₩380B to ₩2.5T by 2025, accounting for 80% of the total EBITDA.(Source: SKC)There seems to be no disagreement as to the fact that these are new businesses that are essential for SKC's growth.However, what the market is really interested in is how SKC will raise this ₩5T.What SKC says on the surface is that it plans to secure it through strategic financing with financial partners, internal cash and asset optimization, etc. Well, isn't this wording too vague?However, SKC presented three fairly specific guidelines along with such vague wording.
Debt ratio: 150~200%
Net Debt-to-EBITDA ratio: less than 4x
Protection of stakeholder interests (well, I do not fully understand what this means.)
(Source: SKC)First, the current level meets the guideline of less than 200%. As of the first half of this year, SKC's debt-to-equity ratio was 182%. It is worse than the 130% debt ratio maintained before 2019, but considering the current cash flow level, it is difficult to see it as dangerous.(Source: FnGuide)ND/EBITDA stood at 5.6x at the end of last year. However, by the end of this year, this ratio is expected to drop to less than 4x. It is because SKC's EBITDA is growing at a reasonably rapid pace. EBITDA increased from ₩300B in 2017 to ₩380B last year and is expected to reach more than ₩600B this year.










Consolidated
2017
2018
2019
2020
2021E (annualized based on 1H21)


Net-debt
₩1,238.4B
₩1,295.3B
₩1,595.6B
₩2,149.7B
₩2,410.1B


EBITDA
₩298.1B
₩328.0B
₩283.1B
₩386.6B
₩638.8B


ND/EBITDA
4.15x
3.95x
5.64x
5.56x
3.77x

Source: FnGuide



SKC Is up 8% Today on a ₩30T Target Value by 2025, but How to Raise a ₩5T Investment?

<div class="content-highlight">
<p>SK E&amp;S is taking its subsidiary <a href="https://www.smartkarma.com/entities/busan-city-gas-co-ltd" target="_blank" data-smartkarma-citation="entities:14452:1" rel="noopener">Busan City Gas (015350 KS)</a> private through a tender offer. On 16 September, SK E&amp;S announced that it would buy 2,595,597 shares of Busan City Gas (23.6% stake) at 85,000 won per share. SK E&amp;S plans to spend 221 billion won in this tender offer. </p>
<p>Prior to this tender offer, SK E&amp;S had a 67.32% stake in Busan City Gas. SK E&amp;S plans to create a synergistic effect in terms of the eco-friendly energy business such as hydrogen and fuel cell power generation of SK E&amp;S with the hydrogen charging business operated by Busan City Gas.</p>
<ul>
<li>Following this news, Busan City Gas' share price reached limit up 30% to 80,300 won. </li>
<li>In order to provide adequate returns for the minority shareholders, SK E&amp;S is trying to complete this tender offer at a price of 85,000 won which is 40.62% higher than the average share price of the company in the past three months. </li>
</ul>
</div>


SK E&amp;S is taking its subsidiary Busan City Gas (015350 KS) private through a tender offer. On 16 September, SK E&amp;S announced that it would buy 2,595,597 shares of Busan City Gas (23.6% stake) at 85,000 won per share. SK E&amp;S plans to spend 221 billion won in this tender offer. 
Prior to this tender offer, SK E&amp;S had a 67.32% stake in Busan City Gas. SK E&amp;S plans to create a synergistic effect in terms of the eco-friendly energy business such as hydrogen and fuel cell power generation of SK E&amp;S with the hydrogen charging business operated by Busan City Gas.

Following this news, Busan City Gas' share price reached limit up 30% to 80,300 won. 
In order to provide adequate returns for the minority shareholders, SK E&amp;S is trying to complete this tender offer at a price of 85,000 won which is 40.62% higher than the average share price of the company in the past three months. 



SK E&S Makes a Tender Offer For Busan City Gas To Take It Private

<p>This morning, SK E&amp;S, the major shareholder of Busan City Gas, announced that it would conduct a tender offer to all remaining outstanding shares of Busan City Gas (2,595,597 shares, 23.60%). The tender offer price is 85,000 won per share, and the purchase period is from today to the 15th of the next month. SK E&amp;S plans to apply for delisting of Busan City Gas.</p><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/230/029/original/3.png?1631755933" class="editor-image img-responsive" data-smartkarma-image-id="230029"></figure></section><p>The total number of issued shares of Busan City Gas is 11,000,000. SK E&amp;S, the largest shareholder, owns 67.23%. And the number of treasury shares is 999,000 (9.08%). Therefore, the total remaining shares are 2,595,597 (23.60%), and SK E&amp;S plans to purchase all of these shares through a tender offer.</p><table class="table table-striped">
<colgroup>
<col width="100">
<col width="100">
<col width="100">
</colgroup>
<tbody>
<tr>
<td data-sheets-value='{"1":2,"2":"Shareholding"}'>Shareholding</td>
<td style="text-align: right;" data-sheets-value='{"1":2,"2":"Shares"}'>Shares</td>
<td style="text-align: right;" data-sheets-value='{"1":2,"2":"%"}'>%</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Total shares"}'>Total shares</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":11000000}' data-sheets-numberformat='{"1":2,"2":"#,##0","3":1}' data-sheets-formula="=R[-6]C[-1]">11,000,000</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":1}' data-sheets-numberformat='{"1":3,"2":"0.00%","3":1}' data-sheets-formula="=R[0]C[-1]/R8C2">100.00%</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"SK E&amp;S"}'>SK E&amp;S</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":7405403}' data-sheets-numberformat='{"1":2,"2":"#,##0","3":1}'>7,405,403</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":0.6732184545454546}' data-sheets-numberformat='{"1":3,"2":"0.00%","3":1}' data-sheets-formula="=R[0]C[-1]/R8C2">67.32%</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Treasury shares"}'>Treasury shares</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":999000}' data-sheets-numberformat='{"1":2,"2":"#,##0","3":1}'>999,000</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":0.09081818181818181}' data-sheets-numberformat='{"1":3,"2":"0.00%","3":1}' data-sheets-formula="=R[0]C[-1]/R8C2">9.08%</td>
</tr>
<tr><td colspan="3"></td></tr>
<tr>
<td data-sheets-value='{"1":2,"2":"ESOP"}'><strong>ESOP</strong></td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":1075}' data-sheets-numberformat='{"1":2,"2":"#,##0","3":1}'><strong>1,075</strong></td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":0.00009772727272727273}' data-sheets-numberformat='{"1":3,"2":"0.00%","3":1}' data-sheets-formula="=R[0]C[-1]/R8C2"><strong>0.01%</strong></td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"KISWIRE"}'><strong>KISWIRE</strong></td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":1266279}' data-sheets-numberformat='{"1":2,"2":"#,##0","3":1}'><strong>1,266,279</strong></td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":0.11511627272727273}' data-sheets-numberformat='{"1":3,"2":"0.00%","3":1}' data-sheets-formula="=R[0]C[-1]/R8C2"><strong>11.51%</strong></td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Other minority shareholders"}'><strong>Other minority shareholders</strong></td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":1328243}' data-sheets-numberformat='{"1":2,"2":"#,##0","3":1}' data-sheets-formula="=R[-5]C[0]-sum(R[-4]C[0]:R[-1]C[0])"><strong>1,328,243</strong></td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":0.12074936363636364}' data-sheets-numberformat='{"1":3,"2":"0.00%","3":1}' data-sheets-formula="=R[0]C[-1]/R8C2"><strong>12.07%</strong></td>
</tr>
<tr><td colspan="3" data-sheets-value='{"1":2,"2":"Source: FnGuide &amp; KRX FIND"}'>Source: FnGuide &amp; KRX FIND</td></tr>
</tbody>
</table><p>From today to the 15th of next month is the tendering period, and SK E&amp;S pays cash. The cash payment date is October 20th. The tendering price is 85,000 won, a whopping 37.54% premium from yesterday's closing price. This is a premium of over 40% compared to the average price for the past 1 month and 3 months.</p><table class="table table-striped">
<colgroup>
<col width="200">
<col width="200">
</colgroup>
<tbody>
<tr><td colspan="2" data-sheets-value='{"1":2,"2":"Pricing"}'>Pricing</td></tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Offering price"}'>Offering price</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":85000}' data-sheets-numberformat='[null,2,"[$₩-412]#,##0",1]'>₩85,000</td>
</tr>
<tr><td colspan="2"></td></tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Last close"}'>Last close</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":61800}' data-sheets-numberformat='[null,2,"[$₩-412]#,##0",1]'>₩61,800</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":" - Premium"}'><strong>- Premium</strong></td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":0.37540453074433655}' data-sheets-numberformat='[null,3,"0.00%",1]' data-sheets-formula="=(R2C2-R[-1]C[0])/R[-1]C[0]"><strong>37.54%</strong></td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"1W average"}'>1W average</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":61300}' data-sheets-numberformat='[null,2,"[$₩-412]#,##0",1]' data-sheets-formula='=average(index(googlefinance(R[-2]C[1], "price", today()-5, today()), 0, 2))'>₩61,300</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":" - Premium"}'><strong>- Premium</strong></td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":0.3866231647634584}' data-sheets-numberformat='[null,3,"0.00%",1]' data-sheets-formula="=(R2C2-R[-1]C[0])/R[-1]C[0]"><strong>38.66%</strong></td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"1M average"}'>1M average</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":59659.09090909091}' data-sheets-numberformat='[null,2,"[$₩-412]#,##0",1]' data-sheets-formula='=average(index(googlefinance(R[-4]C[1], "price", today()-30, today()), 0, 2))'>₩59,659</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":" - Premium"}'><strong>- Premium</strong></td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":0.4247619047619047}' data-sheets-numberformat='[null,3,"0.00%",1]' data-sheets-formula="=(R2C2-R[-1]C[0])/R[-1]C[0]"><strong>42.48%</strong></td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"3M average"}'>3M average</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":60069.354838709674}' data-sheets-numberformat='[null,2,"[$₩-412]#,##0",1]' data-sheets-formula='=average(index(googlefinance(R[-6]C[1], "price", today()-90, today()), 0, 2))'>₩60,069</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":" - Premium"}'><strong>- Premium</strong></td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":0.4150310125392692}' data-sheets-numberformat='[null,3,"0.00%",1]' data-sheets-formula="=(R2C2-R[-1]C[0])/R[-1]C[0]"><strong>41.50%</strong></td>
</tr>
<tr><td colspan="2" data-sheets-value='{"1":2,"2":"Source: DART &amp; KRX"}'>Source: DART &amp; KRX</td></tr>
</tbody>
</table><div class="content-highlight"><p><strong>SK E&amp;S plans to pursue delisting after acquiring shares through a tender offer. According to the stock market listing regulations, if the largest shareholder owns more than 95% of the total issued stock of a target company, they can apply for voluntary delisting.</strong></p></div>

This morning, SK E&amp;S, the major shareholder of Busan City Gas, announced that it would conduct a tender offer to all remaining outstanding shares of Busan City Gas (2,595,597 shares, 23.60%). The tender offer price is 85,000 won per share, and the purchase period is from today to the 15th of the next month. SK E&amp;S plans to apply for delisting of Busan City Gas.The total number of issued shares of Busan City Gas is 11,000,000. SK E&amp;S, the largest shareholder, owns 67.23%. And the number of treasury shares is 999,000 (9.08%). Therefore, the total remaining shares are 2,595,597 (23.60%), and SK E&amp;S plans to purchase all of these shares through a tender offer.







Shareholding
Shares
%


Total shares
11,000,000
100.00%


SK E&amp;S
7,405,403
67.32%


Treasury shares
999,000
9.08%



ESOP
1,075
0.01%


KISWIRE
1,266,279
11.51%


Other minority shareholders
1,328,243
12.07%

Source: FnGuide &amp; KRX FIND

From today to the 15th of next month is the tendering period, and SK E&amp;S pays cash. The cash payment date is October 20th. The tendering price is 85,000 won, a whopping 37.54% premium from yesterday's closing price. This is a premium of over 40% compared to the average price for the past 1 month and 3 months.





Pricing

Offering price
₩85,000



Last close
₩61,800


- Premium
37.54%


1W average
₩61,300


- Premium
38.66%


1M average
₩59,659


- Premium
42.48%


3M average
₩60,069


- Premium
41.50%

Source: DART &amp; KRX

SK E&amp;S plans to pursue delisting after acquiring shares through a tender offer. According to the stock market listing regulations, if the largest shareholder owns more than 95% of the total issued stock of a target company, they can apply for voluntary delisting.

Busan City Gas Tender Offer at a Whopping 40% Premium by SK E&S:

<p>The SK Inc/SK Materials stock swap arb spread has been consistently maintained at a 3% level.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/228/039/original/image_54310233621630910463267.png?1630910464" class="editor-image img-responsive" data-smartkarma-image-id="228039"></figure><p><strong>Then, should we do this arb?</strong></p><p>This depends on how much you see the possibility of cancellation, which is the only risk of this event.</p><p>For this merger to pass the EGM, it must satisfy the following two requirements:</p><div class="content-highlight">
<ul><li><strong>2/3 of attending shareholders to vote for the merger</strong></li></ul>
<p><strong>AND</strong></p>
<ul><li><strong>1/3 of all shareholders to vote for the merger</strong></li></ul>
</div><div id="ember2904" data-message-id="514079"><div><div id="ember2905"><div><div><div><p>First, treasury shares account for 15.07%, which is non-voting shares. So, as SK Inc owns 49.1%, which translates into 58% of the voting shares, it has a pretty good shot at passing the merger by itself alone, even though it falls short of hitting 2/3 (66%).</p></div></div></div></div></div></div><table class="table table-striped">
<colgroup>
<col width="200">
<col width="200">
<col width="200">
</colgroup>
<tbody>
<tr>
<td data-sheets-value='{"1":2,"2":"Shareholding - SK Materials"}'>Shareholding - SK Materials</td>
<td style="text-align: right;" data-sheets-value='{"1":2,"2":"Share %"}'>Share %</td>
<td style="text-align: right;" data-sheets-value='{"1":2,"2":"Voting %"}'>Voting %</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"SK Inc"}'><strong>SK Inc</strong></td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":0.4912}' data-sheets-numberformat='[null,3,"0.00%",1]'>49.12%</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":0.578358648298599}' data-sheets-numberformat='[null,3,"0.00%",1]' data-sheets-formula="=R[0]C[-1]/(1-R3C2)"><strong>57.84%</strong></td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Treasury shares"}'><strong>Treasury shares</strong></td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":0.1507}' data-sheets-numberformat='[null,3,"0.00%",1]'>15.07%</td>
<td style="text-align: right;" data-sheets-value='{"1":2,"2":"-"}'><strong>-</strong></td>
</tr>
<tr><td colspan="3"><strong> </strong></td></tr>
<tr>
<td data-sheets-value='{"1":2,"2":"NPS"}'>NPS</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":0.0713}' data-sheets-numberformat='[null,3,"0.00%",1]'>7.13%</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":0.08395148946190982}' data-sheets-numberformat='[null,3,"0.00%",1]' data-sheets-formula="=R[0]C[-1]/(1-R3C2)"><strong>8.40%</strong></td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Minority shareholders"}'>Minority shareholders</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":0.28680000000000005}' data-sheets-numberformat='[null,3,"0.00%",1]'>28.68%</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":0.33768986223949143}' data-sheets-numberformat='[null,3,"0.00%",1]' data-sheets-formula="=R[0]C[-1]/(1-R3C2)"><strong>33.77%</strong></td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":" - Foreign"}'>- Foreign</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":0.175}' data-sheets-numberformat='[null,3,"0.00%",1]'>17.50%</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":0.20605204285882492}' data-sheets-numberformat='[null,3,"0.00%",1]' data-sheets-formula="=R[0]C[-1]/(1-R3C2)"><strong>20.61%</strong></td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":" - Local institutions/retail"}'>- Local institutions/retail</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":0.11180000000000007}' data-sheets-numberformat='[null,3,"0.00%",1]' data-sheets-formula="=R[-2]C[0]-R[-1]C[0]">11.18%</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":0.13163781938066652}' data-sheets-numberformat='[null,3,"0.00%",1]' data-sheets-formula="=R[0]C[-1]/(1-R3C2)"><strong>13.16%</strong></td>
</tr>
<tr><td colspan="3"></td></tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Voting rights (NPS+minority)"}'><strong>Voting rights (NPS+minority)</strong></td>
<td style="text-align: right;" data-sheets-value='{"1":2,"2":"-"}'>-</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":0.42164135170140127}' data-sheets-numberformat='[null,3,"0.00%",1]' data-sheets-formula="=(R[-4]C[-1]+R[-3]C[-1])/(1-R3C2)"><strong>42.16%</strong></td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Voting rights (minority)"}'><strong>Voting rights (minority)</strong></td>
<td style="text-align: right;" data-sheets-value='{"1":2,"2":"-"}'>-</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":0.33768986223949143}' data-sheets-numberformat='[null,3,"0.00%",1]' data-sheets-formula="=(R[-4]C[-1])/(1-R3C2)"><strong>33.77%</strong></td>
</tr>
<tr><td colspan="3" data-sheets-value='{"1":2,"2":"Source: FnGuide"}'>Source: KRX &amp; FnGuide</td></tr>
</tbody>
</table><p>The issue is stock purchase cost, whose ceiling is set at 800 billion won, representing 18% of the SO and 51% of the minority shareholders' shares.</p><div class="content-highlight"><p><strong>It is important to note that exceeding the ceiling doesn't necessarily mean SK will cancel the merger. Instead, it will consider canceling the merger if the total cost exceeds the ceiling.</strong></p></div><div id="ember2918" data-message-id="514083"><div id="ember2919">
<p>Minority shareholders can be broken down into NPS (7.1%), foreign (17.5%), local institutions/retail (11.2%). I wouldn't care much about local institutions/retail. Local institutional investors typically do not oppose corporate events involving local conglomerates. This is because most of them are affiliates of financial holding companies, which in turn are tied to various deal opportunities with conglomerates such as SK Group. Local retail shareholders have significantly lower shareholder attendance rates. In addition, the proportion of stocks traded after August 23rd, the last day to have a dissent right, should be high.</p>
<p>Then NPS? I don't think they would vote against it. NPS has not said much about the merger so far. There has been a recent case where NPS voted against the corporate event of local conglomerates. But this merger, it'd be different. Since both are listed companies, there is no problem with the merger ratio. In addition, it would be difficult to see that the strategic value of the merger is low enough to claim that SK Materials' shareholder value is damaged.</p>
<p>Then, the key would be foreign shareholders (17.5%). Based on today's closing price, the dissent right spread is around 1%. It is questionable whether such a spread will lead to a huge dissent right exercise. But even if foreign shareholders fully exercised their dissent rights, it would be right below the ceiling.</p>
<table class="table table-striped">
<colgroup>
<col width="200">
<col width="200">
</colgroup>
<tbody>
<tr><td colspan="2" data-sheets-value='{"1":2,"2":"Spread - stock purchase"}'>Spread - stock purchase for SK Materials</td></tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Current price"}'>Current price</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":410400}' data-sheets-numberformat='[null,2,"[$₩-412]#,##0",1]'>₩410,400</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Exercise price"}'>Exercise price</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":415751}' data-sheets-numberformat='[null,2,"[$₩-412]#,##0",1]'>₩415,751</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Transfer income tax"}'>Transfer income tax</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":1122.22}' data-sheets-numberformat='[null,2,"[$₩-412]#,##0",1]'>₩1,122</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":" - Shares"}'>- Shares</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":10000}' data-sheets-numberformat='[null,2,"#,##0"]'>10,000</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Tax-adj. exercise price"}'>Tax-adj. exercise price</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":414628.78}' data-sheets-numberformat='[null,2,"[$₩-412]#,##0",1]'>₩414,629</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Spread"}'>Spread</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":0.01030404483430806}' data-sheets-numberformat='[null,3,"0.00%",1]'>1.03%</td>
</tr>
<tr><td colspan="2" data-sheets-value='{"1":2,"2":"Source: DART &amp; KRX"}'>Source: DART &amp; KRX</td></tr>
</tbody>
</table>
</div></div><div class="content-highlight"><p><strong>So, my prediction is this merger will go through.</strong></p></div>

The SK Inc/SK Materials stock swap arb spread has been consistently maintained at a 3% level.Then, should we do this arb?This depends on how much you see the possibility of cancellation, which is the only risk of this event.For this merger to pass the EGM, it must satisfy the following two requirements:
2/3 of attending shareholders to vote for the merger
AND
1/3 of all shareholders to vote for the merger
First, treasury shares account for 15.07%, which is non-voting shares. So, as SK Inc owns 49.1%, which translates into 58% of the voting shares, it has a pretty good shot at passing the merger by itself alone, even though it falls short of hitting 2/3 (66%).







Shareholding - SK Materials
Share %
Voting %


SK Inc
49.12%
57.84%


Treasury shares
15.07%
-

 

NPS
7.13%
8.40%


Minority shareholders
28.68%
33.77%


- Foreign
17.50%
20.61%


- Local institutions/retail
11.18%
13.16%



Voting rights (NPS+minority)
-
42.16%


Voting rights (minority)
-
33.77%

Source: KRX &amp; FnGuide

The issue is stock purchase cost, whose ceiling is set at 800 billion won, representing 18% of the SO and 51% of the minority shareholders' shares.It is important to note that exceeding the ceiling doesn't necessarily mean SK will cancel the merger. Instead, it will consider canceling the merger if the total cost exceeds the ceiling.
Minority shareholders can be broken down into NPS (7.1%), foreign (17.5%), local institutions/retail (11.2%). I wouldn't care much about local institutions/retail. Local institutional investors typically do not oppose corporate events involving local conglomerates. This is because most of them are affiliates of financial holding companies, which in turn are tied to various deal opportunities with conglomerates such as SK Group. Local retail shareholders have significantly lower shareholder attendance rates. In addition, the proportion of stocks traded after August 23rd, the last day to have a dissent right, should be high.
Then NPS? I don't think they would vote against it. NPS has not said much about the merger so far. There has been a recent case where NPS voted against the corporate event of local conglomerates. But this merger, it'd be different. Since both are listed companies, there is no problem with the merger ratio. In addition, it would be difficult to see that the strategic value of the merger is low enough to claim that SK Materials' shareholder value is damaged.
Then, the key would be foreign shareholders (17.5%). Based on today's closing price, the dissent right spread is around 1%. It is questionable whether such a spread will lead to a huge dissent right exercise. But even if foreign shareholders fully exercised their dissent rights, it would be right below the ceiling.






Spread - stock purchase for SK Materials

Current price
₩410,400


Exercise price
₩415,751


Transfer income tax
₩1,122


- Shares
10,000


Tax-adj. exercise price
₩414,629


Spread
1.03%

Source: DART &amp; KRX


So, my prediction is this merger will go through.

SK Inc/SK Materials Merger: Approval Possibilities & Another Arb Opportunity with SK Inc Futures

South Korea

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