[Why&Next] Choi Tae-won and Noh So-young Property Division... Effect of Blocking Children's Succession of Management Rights

Capital Market and Business Circles Expect Chairman Chey Tae-won's Home Mortgage Loan to Secure Funds for Asset Division
SK Inc. Performance and Stock Price Improvement, Accelerated Corporate Governance Restructuring 'Positive'
Structure Making Succession to Children Impossible Due to Mother's Asset Division 'Ironic'

"SK Inc. Stock Price Soars. SK Corporate Governance Restructuring Accelerates... However, Succession of Management Rights Must Be Abandoned."

This is the consensus opinion among capital market experts regarding the second trial ruling of the divorce lawsuit between SK Group Chairman Chey Tae-won and Noh So-young, director of the Art Center Nabi.

Capital market experts predict that Chairman Chey will prioritize stock-backed loans to raise funds for the division of assets amounting to approximately 1.38 trillion KRW. It is expected that while aiming for a reversal in the Supreme Court ruling, he will simultaneously prepare measures to secure cash. The business community also highly anticipates that Chairman Chey is more likely to utilize stock-backed loans rather than selling shares.

It is forecasted that Chairman Chey will proceed in the order of stock-backed loans → improved performance → stock price increase → minimizing dilution of shares by leveraging his approximately 17.73% stake in SK Inc. This is because increasing the value of SK Inc. shares pledged as collateral more than the borrowed amount minimizes share dilution, which is advantageous for Chairman Chey.

He is expected to first proceed with stock-backed loans from securities firms, and if performance or stock prices do not meet expectations, an additional scenario suggests that Chairman Chey, familiar with capital markets, may even utilize private debt funds.

The CEO of A Financial Investment Company analyzed, "Certainly, an upward trend in SK Inc.'s stock price is expected. The entire group, including subsidiaries, will work hard to improve performance and stock prices, and later, they will try to repay the stock-backed loans while minimizing the shares sold."

When utilizing stock-backed loans, interest burden must be borne. Currently, the interest rate on stock-backed loans ranges from 6% to 10% annually. For example, if a 1 trillion KRW stock-backed loan is taken, the monthly interest would be at least 5 billion KRW.

The CEO of Company A stated, "When securities firms lend against stocks, they anticipate follow-up and ancillary transactions with SK Group, so although they are creditors, they are unlikely to impose harsh conditions on Chairman Chey."

After the ruling is finalized, if Chairman Chey does not pay the asset division amount to Director Noh, he must pay delayed interest calculated at a 5% annual rate.

Meanwhile, the value of Chairman Chey’s stake in SK Inc. was approximately 2.0816 trillion KRW as of 12:20 PM on the 31st of last month. According to the securities industry, the limit for stock-backed loans is generally 50-60% of the market price, so Chairman Chey is expected to be able to obtain up to 1.249 trillion KRW in stock-backed loans.

To Raise Trillions for Mother's Asset Division → Succession of Management Rights by Children Becomes Difficult, an 'Irony'

The problem is that if stock-backed loans or stock sales proceed, the gifting and inheritance of shares to children and the succession of management rights through them become even more difficult.

The CEO of B Asset Management Company said, "The holding company SK has a high net asset value (NAV) discount rate, but if a few structural adjustments are made, the stock price will rise quickly. By reorganizing several affiliates and maximizing the repurchase and cancellation of treasury shares, the stock price can explode."

He added, "However, if the stock price rises, the succession of management rights must be abandoned, and the group size will shrink." From the major shareholder’s perspective, if the stock price rises too much, inheritance tax and premium issues make succession difficult. For Chairman Chey, if the stock price rises, it becomes difficult to transfer shares to his children, and if the stock price falls, repaying debt becomes difficult.

In the case of share sales rather than stock-backed loans, both group control and succession of management rights are weakened. A representative of C Private Equity Fund said, "It is obvious that there is no cash, and I understand that leverage on loans is already high. Even if they try to attract financial investors, they need collateral to borrow, so it seems there is no way other than selling their own shares."

The SK Group succession structure has not yet been determined. Since Chairman Chey’s children do not yet hold company shares, succession is expected to face greater difficulties depending on the divorce trial outcome. Earlier, in an interview with Bloomberg in Paris in October last year, Chairman Chey said, "If I have an accident, there must be someone to lead the company. I have been thinking a lot about succession and need to start preparing. I have my own plan for succession, but it is not yet time to disclose it."

If Director Noh receives the asset division in shares, gifting and inheritance to children would be possible, but currently, she is demanding cash division. Unlike the first trial where she requested stock division, in the appeal trial, she demanded cash settlement. In 2019, Director Noh requested 300 million KRW in alimony and 50% of SK Inc. shares held by Chairman Chey, but in this appeal, she demanded 2 trillion KRW in cash as the divided asset. Director Noh also said in an interview with the media immediately after the first trial ruling, "What I requested was asset division, not company division."

SK Group Corporate Governance Restructuring Accelerates... "Something Must Be Sold"

The sale of a 29.4% stake in SK Siltron, an unlisted company, is also being discussed. Chairman Chey personally acquired shares when SK Inc. acquired Siltron from LG in 2017. At the time of acquisition, Chairman Chey’s stake was valued at about 260 billion KRW, but during this trial process, it was recognized as 750 billion KRW, three times higher. Even after utilizing this method, any shortfall must be raised by selling other assets such as real estate.

Along with the divorce lawsuit, SK Group’s corporate governance restructuring is expected to accelerate. SK Group is currently conducting diagnostic work for portfolio readjustment across all affiliates. The investment industry anticipates that SK Group will complete the review of all affiliates within the first half of the year and begin full-scale divestment of non-core businesses in the second half.

Among SK Group affiliates, over the past five years, more than 20 companies have been sold, attracted investment, or gone public, including SK REITs, SK Biopharm, SK Pharmteco, SK On, SK Enmove, SK Chemical, and SK Bioscience. From the perspective of share liquidity and business restructuring, about 10 affiliates remain. These include SK Specialty (special gases), Korea Oil Pipeline Corporation, SK T&I (trading), SK Entum (tank terminal), SK Rent-a-Car, SK ElecLink (electric vehicle charging), SK PIC Global (petrochemical products), SK KCFT (secondary battery copper foil), and SK Advanced (petrochemical). The investment banking (IB) industry expects SK Group to undertake large-scale business restructuring. An IB industry official said, "Currently, SK Group’s policy is interpreted as large-scale business restructuring and affiliate share sales."