- SK Discovery’s tender offer price is very low, representing a 74% discount to net assets.
- SK Chemicals has still not adequately compensated its shareholders for the split-off of SK Bioscience. The Korean regulator has recognised how split-offs can hurt the interests of investors.
- Only a wholesale restructuring can restore the market’s trust in SK Chemicals.
Metrica Partners Pte. Ltd. manages various investment funds that own shares in SK Chemicals Co., Ltd. (code: 285130).
SK Chemicals is currently subject to a tender offer by SK Discovery Co., Ltd. (code: 006120). SK Discovery is offering to buy 5.22% of SK Chemicals’ shares for ₩108,800 per share.
Metrica believes the offer price to be wholly inadequate and it does not intend to tender any of its funds’ shares.
The offer price represents a 74% discount to the value of SK Chemicals’ net assets of ₩425,042 per share, according to the most recent report posted on the company’s website (adjusted for subsequent share price movements).
Why does SK Discovery believe it can buy shares so cheaply? In Metrica’s view, it is because the market has lost trust in SK Chemicals’ corporate governance.
In 2021, SK Chemicals conducted a split-off and IPO of its fast-growing subsidiary SK Bioscience, without giving shareholders any right to subscribe to the deal. After the IPO, SK Bioscience shares rose five times in six months, while SK Chemicals shares fell. It created a massive transfer of wealth from SK Chemicals shareholders to SK Bioscience IPO investors, attracting unfavourable commentary in the local media (“Why do Korean-style corporate split-offs wreak havoc on minor shareholders?” – Korea Times, 10 February 2022).
Other advanced economies protect legacy company shareholders in a split-off through IPO participatory rights or other compensation. The FSC has now recognised this, and last week it announced rules to bring Korea closer to global best practices (“Measures to Improve Protections for General Shareholders in IPO of Split off Subsidiary” – Financial Services Commission, 5 September 2022).
This won’t help the long-suffering shareholders of SK Chemicals. A wholesale restructuring is needed to restore the market’s trust and shrink the discount.
One year ago, Metrica wrote to the company (reproduced on Metrica’s website), urging it to sell some of its 68.3% stake in SK Bioscience and return the proceeds to shareholders via cash or a significant share buyback. At the time, the SK Bioscience share price was ₩335,000.
While SK Chemicals responded with several value-enhancing initiatives, including a new dividend policy, these were all very limited in scale, and it is no surprise that they have failed to reduce the discount meaningfully. Meanwhile, SK Bioscience’s shares have fallen to ₩107,500. In other words, SK Chemicals has left a lot of money on the table by not implementing Metrica’s suggestions in a timely manner.
Even so, it is not too late. A restructuring could still unlock a large proportion of the 305% upside between SK Chemicals’ current share price and its net asset value. The majority of this would flow to Korean investors, who own 81% of the company.
Metrica will continue to press for better governance at SK Chemicals until the company has resolved this issue. If the company does nothing, it is likely that Metrica and other like-minded shareholders will buy more SK Chemicals shares to be able to force through the necessary measures. Metrica has already increased its funds’ holdings of SK Chemicals shares by almost seven times (as of 31 August; includes positions held through total return swaps) since the release of the first open letter.
Ultimately, Metrica still believes that the best outcome for all stakeholders would be for the current directors and management, who know the company better than anyone else, to address these issues themselves. This would resolve the discount while dramatically improving the market’s perception of SK Chemicals and the whole SK Group.
About Metrica Partners Pte. Ltd.:
Metrica Partners Pte. Ltd. is a Singapore-based investment management company, founded in 2016 by Damian L. Edwards and David Mulvenna.
As an independent firm, free from the conflicts of interest often found at other investment managers, Metrica regularly exercises its right to makes proposals to its portfolio companies. These proposals take the form of concrete, actionable steps aimed at improving corporate governance and boosting shareholder value. Metrica’s recommendations for SK Chemicals are intended to produce higher returns for all investors, including pension funds that manage Korean retirement assets.
Contact Damian L. Edwards, email@example.com, +65 6904 1992.