NPS to veto SK Innovation’s merger with LNG affiliate

South Korea’s National Pension Service (NPS), manager of the world’s third-largest public pension fund, said on Thursday it is set to veto SK Innovation Co.'s plan to merge with its liquefied natural gas (LNG) affiliate — a move that would jeopardize the country’s No. 2 conglomerate SK Group’s restructuring efforts.

The NPS, SK Innovation’s second-largest shareholder with a 6.21% stake, rejected the merger plan at the company’s Aug. 27 extraordinary shareholder meeting, saying the merger with the unlisted SK E&S Co. would hurt the shareholder value of SK Innovation.

SK Innovation and SK E&S set the ratio of their merger at 1 to 1.1917417, defying expectations of a 1 to 2 ratio. SK Group may have undervalued SK E&S in view of potential opposition from SK Innovation shareholders, some analysts said.

The NPS said the merger ratio would likely dilute SK Innovation’s shareholder value. Seoul-based proxy adviser Sustinvest urged institutional investors to veto the merger plan as the ratio was expected to hurt individual shareholders.

OTHERS MAY JOIN THE MOVE

The NPS’ decision is expected to cause other institutional investors to reject the merger as many of them usually follow the pension manager’s moves.

“Once the NPS vetoes the merger, other institutional investors are likely to exercise their voting rights in line with the move,” said a financial investment industry source. “It will be a key to winning approval from foreign investors at the shareholder meeting.”

The NPS’ objection may have an impact on shareholders’ exercise of appraisal rights, industry sources said.

SK Innovation is poised to set aside 800 billion won ($597.3 million) to buy its stocks from shareholders if the price falls below 111,943 won per share. On Friday, SK Innovation shares shed as much as 2.7% to close at 103,300 won.

The merger could fail if costs to exercise the appraisal rights exceed SK Innovation's funding. The company may have to spend 650 billion won if the NPS decides to exercise rights for all of its SK Innovation shares.

NEEDS TO CONSIDER LONG-TERM GROWTH

The NPS may have decided to object to the merger based on short-term interests, hindering the long-term growth of SK Group, asset management industry sources said.

“The NPS is the second-largest shareholder of SK Inc., the parent of SK Innovation,” said the head of an asset manager. “It did not make a comprehensive decision although as a major shareholder of SK Inc. it must consider the long-term business.”

The pension manager holds a 7.44% stake in SK Inc., the group’s holding company, which has a 36.22% stake in SK Innovation.

The nation's top energy company aims to become the industry leader in Asia through the merger while improving its financial structure, which was mired by support for its sluggish electric vehicle battery unit, SK On Co.

Global proxy advisers Institutional Shareholder Services Inc. (ISS) and Glass Lewis & Co. urged shareholders to approve the mergers, saying the risks of SK Innovation’s refining business could be hedged with SK E&S’ LNG business.

“SK Group’s business restructuring is an important move which can impact various sectors,” said an investment banking industry source. “I am concerned that the NPS may have decided to veto the merger for its short-term profits.”

Write to Byeong-Hwa Ryu and Sang Hoon Sung at hwahwa@hankyung.com
 
Jongwoo Cheon edited this article.