[Click eStock] "SK Should Cancel Treasury Shares... Target Price ↓"

"Possibility of Controlling Shareholder Abuse Without Treasury Stock Cancellation"
SK C&C Cancels Treasury Stock After SK Absorption Merger
Minimizing Chairman Chey Tae-won's Shareholding Reduction
SK Has No Treasury Stock Cancellation... No Real Benefit for Common Shareholders

Hi Investment & Securities pointed out on the 24th that although the governance structure of SK has become simpler with Chairman Chey Tae-won at the top after the merger with SK C&C, the increase in SK's treasury shares means the effect of governance improvement is not significant. Accordingly, they maintained the investment opinion as 'Buy' but lowered the target price to 240,000 KRW.

Researcher Lee Sang-heon of Hi Investment & Securities stated, "When treasury shares lead to cancellation, the possibility of controlling shareholders abusing treasury shares decreases, and the effect of governance improvement will fully materialize."

SK C&C decided to absorb and merge with the holding company SK in April 2015 and canceled all treasury shares it held. The researcher pointed out, "This reduced the number of SK C&C's circulating shares, effectively minimizing the decrease in Chairman Chey Tae-won's stake in the surviving merged entity (SK C&C). Additionally, the governance structure that went from Chairman Chey Tae-won → SK C&C → SK was simplified to Chairman Chey Tae-won → SK."

During the merger process, SK C&C's existing 14.94 million SK shares were converted into 11.01 million new merger shares according to the merger ratio and accumulated again as treasury shares. SK also purchased an additional 3.51 million treasury shares over about two months starting September 1, 2015, immediately after the merger to stabilize the stock price. This means SK holds a total of 11.54 million treasury shares, accounting for 20% of the total issued shares.

Furthermore, from October 2, 2019, to December 11, 2019, SK acquired 3.52 million treasury shares through the stock market to enhance shareholder value by stabilizing the stock price. As of the end of last year, SK's major shareholders were Chairman Chey Tae-won and related parties with 26.0%, the National Pension Service with 8.3%, treasury shares at 25.6%, and others at 40.1%.

The researcher noted, "SK's treasury shares amount to 18,974,820 shares," and added, "U.S.-based asset management firms Dalton Investment and Life Asset Management sent an open shareholder letter to SK demanding the cancellation of some treasury shares."

In response, SK decided in August last year to repurchase treasury shares worth 200 billion KRW, and the treasury shares acquired over six months through a trust contract are scheduled to be fully canceled by March this year.

The researcher emphasized, "SK's treasury share repurchase had insufficient effect from the perspective of stock price increase," and added, "Only by canceling treasury shares can a definite mid- to long-term stock price boost effect be realized." He further stated, "Whether treasury shares will be canceled in the future will be the most decisive variable in shareholder return policy."