Shares of companies that decided to absorb loss-making subsidiaries have fallen in succession, a slide analysts attribute to concerns over heavier financial burdens and dilution of shareholder value from newly issued merger shares. Some analysts, however, argue the deals could generate medium- to long-term synergies.
SK Innovation (096770) closed at 111,200 won on the 26th, down 11.04%, according to the Korea Exchange on the 27th. The company's board approved a merger with subsidiary SK IE Technology, or SKIET, on the 25th. SKIET makes separators, a core material in lithium-ion batteries for electric vehicles, and posted an operating loss of 246.4 billion won last year. The losses have continued this year, with an operating loss of 136.7 billion won in the first half. Under the merger terms, SKIET common shareholders will receive 0.11 SK Innovation common shares for each share they hold.
The market is concerned that absorbing a loss-making unit will add to the financial burden. With growth in the EV market still slowing in what the industry calls a chasm, a rebound in the separator business remains uncertain, raising the possibility that the merger will weigh on SK Innovation's financial statements. Dilution of existing shareholder value through new merger shares is another concern. SK Innovation plans to issue 4,481,300 new shares to deliver stock to the absorbed subsidiary under the merger ratio, equal to about 2.6% of total shares outstanding.
SK Gas, which formally announced a merger with subsidiary SK Advanced, also weakened. On the 26th, SK Gas closed at 227,500 won in the Nextrade (NXT) aftermarket, down 3.60% from its regular-session close. The stock had been up more than 2% around 3 p.m., 30 minutes before the regular session ended, but gave up those gains after the merger announcement and turned lower. SK Advanced posted an operating loss of 140 billion won last year. Its core commodity petrochemical business has struggled to secure profitability amid a flood of supply from China.
Some analysts see the mergers strengthening the parent companies' business competitiveness over the medium to long term. "Before the merger with SK Innovation, 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-interest results," said Lee Dong-wook, an analyst at IBK Investment & Securities. "The key point to watch will be not the merger itself but the pace at which SKIET narrows its quarterly losses, the rise in utilization at its Poland plant, and the visibility of new orders centered on energy storage systems and European customers."
