Horizontal merger method for ‘internal independent companies’
Maintaining each company’s business without breaking apart
Continuation of profit structure to minimize shareholder opposition
Easily bringing in cash to ‘acquire SK On’,
Getty Images Bank,
, ‘The merger plan between SK Innovation and SK E&S, the core of SK Group’s ‘rebalancing,’ has been confirmed to proceed in a ‘horizontal merger’ method to minimize shareholder opposition. While considering various scenarios, they chose a path to avoid opposition and allegations of breach of duty from other shareholders besides the controlling shareholders.’,
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, ‘According to the industry on the 15th, SK Innovation and SK E&S are scheduled to hold a board meeting on the 17th to discuss the merger agenda. It was reported that both companies agreed on establishing a Corporate Independent Company (CIC) system using a horizontal integration method, rather than a vertical integration method under SK Innovation structurally placing SK E&S. SK Innovation and SK E&S will merge with horizontal decision-making authority, maintaining their existing organizational and business structures. CIC is a method of creating a separate entity within a company to operate a specific business independently, granting authority and responsibilities. SK E&S can continue its existing businesses such as city gas and liquefied natural gas (LNG) power generation without changes, and SK Innovation can easily bring in cash from SK E&S.’,
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, ‘This is seen as a result conscious of external shareholders’ opposition. It is known that EGCO, an energy company in Thailand holding a 49% stake in SK E&S’s subsidiary Paju Energy Service, played a complicating role in the merger discussions. Initially, a method of separating SK E&S’s city gas subsidiary and attaching it to SK On was considered, but EGCO expressed opposition. It could lead to a ‘breach risk’ where if SK E&S redirects some of its valuable subsidiaries to SK Innovation or SK On, the loss of competitiveness of SK E&S could increase, resulting in company losses.’,
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, ‘The fact that private equity fund manager Kohlberg Kravis Roberts (KKR), which holds SK E&S’s redeemable convertible preferred shares (RCPS), needed to maximize financial effects, also influenced the decision to proceed with the horizontal merger method. KKR holds over 3 trillion won worth of SK E&S RCPS. KKR holds most of the liquidity funds held by SK E&S, known as ‘shadow debt.’ KKR held subsidiaries of SK E&S such as Gangwon City Gas, Yeongnam Energy Services, Kowon Energy Services, Jeonbuk Energy Services, Jeonnam City Gas, Chungcheong Energy Services, and Busan City Gas as redemption assets. If KKR opposes the merger method and demands redemption, SK E&S will lose a major source of cash. After the merger, the financial situation may even worsen. Currently, it is known that KKR has no significant issues with the horizontal integration method and plans to cooperate with the merger in the future.’,
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, ‘SK Group’s decision to minimize shareholder opposition and to finalize the merger of both parties by the end of the year in order to achieve the goal of ‘acquiring SK On’ is based on the judgment that horizontal integration is the best option for now. In particular, the CIC method can minimize the loss of competitiveness that may occur during the merger process. Concerns were raised about weakening the competitiveness of one side due to organizational restructuring and business downsizing if forced absorption merger had been pursued because SK Innovation and SK E&S have different main business purposes. An industry source stated, “It is the optimal merger plan to maintain the fundamental competitiveness of SK E&S and inherit the profit structure.” If the merger discussions proceed smoothly, the expected merger date is set to be November 1.’, ‘\n’]