SK Innovation looks to merge with SK E&S for organic growth

SK Innovation Co., the parent of South Korea’s largest oil refiner SK Energy Co. and battery maker SK On Co., is looking to merge with energy affiliate SK E&S Co.

If successful, the merger would create Korea’s eighth-largest company with combined assets of 106 trillion won ($77 billion).

SK Group, the country’s second-largest conglomerate, is expected to approve the merger plan at a meeting of key affiliate executives on June 28 and 29, a local media outlet reported on Thursday, citing unidentified industry sources.

SK Innovation and SK E&S will separately hold their respective board and shareholders’ meetings next month to approve the plan and work out follow-up measures, the report said.

SK Inc., the investment and holding company of SK Group, owns 36.2% of SK Innovation and 90% of SK E&S.

In response to the media report, SK Innovation said in a regulatory filing that it is “considering various strategic measures, including an M&A” to enhance its business competitiveness.

“But nothing has been decided on the matter at the moment. We will make public any decisions made regarding this within a month,” it said.

SK INNOVATION SHARES SURGE

Earlier on Thursday, shares of SK Innovation listed on the main Kospi bourse surged as high as 20% to 126,000 won, outperforming the benchmark index’s 0.3% rise.

SK E&S is an unlisted company.

SK Inc.’s shares fell 5.7% to 157,600 won on the day.

SK Innovation is Korea’s largest energy company, with business areas spanning oil refining, petrochemicals and lubricants.

The company posted an operating profit of 1.9 trillion won on sales of 77 trillion won in 2023.

SK E&S, Korea’s top city gas supplier, is mainly engaging in the liquefied natural gas (LNG) business as well as renewable energy sources such as solar, wind power and hydrogen.

The company posted an operating profit of 1.3 trillion won on sales of 11 trillion won last year.

Industry watchers said if the combination of SK Innovation and SK E&S is completed as planned, SK Group would also likely seek mergers among their affiliates.

Under one scenario, battery maker SK On will merge with Narae Energy Service Co., which offers power plant operation, maintenance and other related services, and Prism Energy International, another SK E&S affiliate that provides LNG brokerage and sales services.

TO SHORE UP LOSS-MAKING BATTERY UNIT

The reported merger comes as SK Group is considering corporate restructuring to reduce the number of its affiliates and explore new growth drivers.

Analysts said SK Group seems to be seeking a merger between SK Innovation and SK E&S, a profitable company with a strong balance sheet, to partly shore up loss-making battery affiliate SK On.

SK Group spun off SK Innovation’s battery division as a separate entity in October 2021 to foster a new growth engine.

However, SK On has been losing money owing to the heavy initial investments required of a new battery maker but also due to slowing global electric vehicle uptake, being called a “chasm.”

SK On posted a 306.9 billion won net loss in the first quarter, extending its losing streak to the 10th straight quarter. The company posted 748.1 billion won in net losses in 2023.

To compete with its rivals, the company has steadily borrowed funds for facility investment with accumulated borrowing standing at 15 trillion won at the end of March.

SK On is expected to need an additional 7 trillion won until the end of this year.

Industry watchers said if the merger goes according to plan, it would be led by SK Innovation Senior Vice Chairman Chey Jae-won and SK On Vice Chairman Yu Jeong-joon. Both served as chief executives of SK E&S.

Write to Hyung-Kyu Kim at khk@hankyung.com

In-Soo Nam edited this article.