[SK Rebalancing] Battery and Oil's 'Awkward Cohabitation'... "Questions on Sustainability of Investment"

Board Meeting on the 17th... SK On to Pursue Trading and Entum Merger

SK Innovation has decided to merge two profitable subsidiaries related to its oil business into SK On, but concerns are emerging that the sustainability of this move is low due to the battery business's nature, which requires trillion-won scale investments.

On the 17th, SK Innovation's board of directors will discuss a plan to merge SK Trading International, which handles crude oil and petrochemical product imports and exports, and SK Entum, which operates oil and petrochemical product tank terminal businesses, into SK On. If this plan is approved at an extraordinary general meeting following the board meeting, the 'awkward coexistence' of the traditional oil industry and the next-generation battery industry will begin.

SK Trading International and SK Entum are classified as 'cash cows' because they generate stable cash flow despite relatively low investor interest. As 100% subsidiaries of SK Innovation, unlike the SK Enmove merger rumors, they can avoid issues of opposition from minority shareholders or private equity funds. An industry insider said, "Although SK On could raise funds from the market, such as through the recent issuance of 500 billion won in perpetual bonds, this is temporary and comes with high interest burdens. Bringing in companies with good cash flow into the battery business allows for steady capital management."

By merging with these companies, SK On, which has been in the red for years, could also expect to turn a profit. SK On's loss last year was 581.8 billion won. SK Trading International posted sales of 49 trillion won and an operating profit of 574.6 billion won last year, while SK Entum, newly established earlier this year, recorded sales of 257.6 billion won during the same period. The tank terminal business is stable and less affected by market conditions, so it is expected to continue playing a cash cow role.

SK On Battery Plant in Georgia, USA
Photo by SK On

However, the merger itself is not seen as a fundamental solution to SK On's financial problems. An industry insider said, "As a listed company, SK Innovation is prioritizing entrusting subsidiaries with good cash flow because continuous support for SK On would further deteriorate its stock price and corporate credit. SK On missed its IPO timing due to the crossfire faced by LG Energy Solution after listing and is also experiencing a demand chasm, so this appears to be a desperate measure in a difficult internal and external situation."

As a latecomer in the battery market, SK On has recorded operating losses for 10 consecutive quarters, with cumulative losses reaching 2.3 trillion won. Hwang Kyu-won, a researcher at Yuanta Securities, said, "SK On's capital expenditure this year is 7.5 trillion won, while SK Innovation's EBITDA (earnings before interest, taxes, depreciation, and amortization) for this year is 3.5 trillion won. SK On needs to raise about 4 trillion won in external funds solely for the battery business."

The merger of the three companies is far from the original intention of strengthening battery expertise by establishing an independent management system when SK On was launched in 2021 after spinning off the battery business. SK Trading International and SK Entum were also established by spin-offs from SK Energy, a subsidiary of SK Innovation, in 2013 and this year, respectively, to strengthen business competitiveness.

There is also little expectation of synergy from the merger. While SK Entum and SK Trading International overlap in logistics and supply chain management, their relevance to the battery business is minimal.