Hana Securities: SK Innovation faces a heavier subsidiary burden than 2.6% dilution, needs shareholder protection measures

[Financial News] Hana Securities said SK Innovation's absorption merger with SK ie technology (SKIET) was an unavoidable choice to prevent financial risks from spreading. However, it added that concrete shareholder protection measures are needed, as SK Innovation shareholders, who could not directly benefit from the equity value of a growth subsidiary during the earlier spin-off, will now have to bear the subsidiary's weak performance and financial burden.
On the 27th, Hana Securities analyst Yoon Jae-sung maintained a 'buy' rating on SK Innovation and a target price of 200,000 won, saying, "It is necessary to clearly define the limit of additional funding support for SKIET and SK On, and to present guidelines for existing shareholders, including share buybacks and cancellations, as well as higher dividends."
Earlier, SK Innovation decided on the 25th to absorb SKIET through a small-scale merger. It will allocate 0.117454 SK Innovation shares for each SKIET share, while no new shares will be issued for the 53.35% stake held by SK Innovation. The new shares issued only for outside shareholders will total about 4.48 million, resulting in dilution of existing shareholders' stakes by about 2.6%.
Hana Securities viewed the merger as primarily a move to block SKIET's liquidity risk. SKIET posted an operating loss of 136.7 billion won in the first half of this year, while net debt rose to 1.15 trillion won and its debt ratio climbed to 152%. Debt due for repayment or refinancing within a year stands at about 1.25 trillion won, compared with cash and cash equivalents of only about 240 billion won.
After the merger, SK Innovation is expected to use its credit strength to secure more stable funding and reduce financial costs. Yoon described the move as "a last-resort measure to prevent SKIET's possible default from spreading into business and financial risks across the group."
However, the 11% plunge in SK Innovation's share price the day after the merger announcement is difficult to explain by the 2.6% dilution alone, the brokerage said. It argued that the market also reflected the possibility of additional losses and funding for SKIET, cash settlement obligations related to the price return swap, and share purchase claims, as well as possible cash outflows or further dilution during the future process of disposing of SK On's 10.67% outside stake.
Hana Securities also highlighted the conflict of interest between existing shareholders and subsidiaries. When SK On and SKIET were spun off, SK Innovation shareholders did not receive shares in the newly established entities, and the rise in corporate value from SKIET's listing was not fully reflected in the parent company's stock price because of the double-listing discount. Now, however, they are being asked to absorb SKIET's weak business performance and financial risks again in the form of new share dilution and funding burdens.
Yoon said, "Even if cash flow improves on the back of strong refining and lubricant base oil conditions, expectations for greater returns to existing shareholders will inevitably weaken if subsidiary support takes priority." He added, "There is a need for clear limits on additional support and specific guidelines to return increased profits to shareholders through share buybacks, cancellations and higher dividends."

[email protected] Kim Kyung-a Reporter