Shares of SK Innovation (096770.KS) tumbled nearly 15% in early trading after the company decided to absorb its separator-materials subsidiary through a merger. The decline is seen as reflecting concerns over shareholder dilution from newly issued merger shares and a heavier financial burden. Shares of the subsidiary, which will receive parent-company stock, extended modest gains.
As of 9:32 a.m. on the 26th, SK Innovation was trading at 106,700 won, down 14.64% from the previous session, according to the Korea Exchange. The company's board approved the merger with subsidiary SK IE Technology (SKIET) at a meeting the previous day. SKIET makes separators, a key material in lithium-ion batteries for electric vehicles. Under the merger, holders will receive 0.11 SK Innovation common share for each SKIET common share.
The weakness in SK Innovation's stock is attributed to the issuance of new merger shares and the added financial burden of absorbing the subsidiary. SK Innovation plans to issue 4,481,300 new shares to deliver stock to the absorbed subsidiary under the merger ratio. That amounts to about 2.6% of total shares outstanding, which could dilute the stock. SKIET has also struggled to secure profitability amid a recent slowdown in the electric-vehicle market, which could weigh on future financial statements.
SKIET shares, by contrast, rose 3.32%. After years of losses, the company is being absorbed into a parent with relatively solid financial capacity while receiving parent-company stock, sending its shares higher.
Over the medium to long term, some see the merger as supporting SK Innovation's business. Lee Dong-wook, an analyst at IBK Investment & Securities, said in a report the same day that before the merger, 46.65% of SKIET's profit and loss was attributable to non-controlling interests, but afterward all of it will be reflected in SK Innovation's controlling-shareholder results. He added that the key points to watch will be less the merger itself than the pace at which SKIET narrows its quarterly losses, the rise in its Poland plant utilization rate, and the visibility of new orders centered on energy storage systems (ESS) and European customers.
