SK Group to merge units amid chaebol clean-up

SK Group, South Korea's third-largest conglomerate, will merge its holding company with its IT services provider in an effort to simplify the group's ownership structure amid growing public pressure to improve corporate governance.

The move comes as South Korea's big family-run conglomerates, known as chaebols, are being prodded by the government to simplify complex cross-shareholdings that enable the families to control wide-ranging businesses in spite of their small direct shareholdings.

SK C&C, the group's IT services provider, said on Monday that it would acquire the group's holding company SK Holdings in an all-stock deal aimed at stimulating growth at the merged company and improving its finances.

Each SK C&C common share will be swapped for 0.74 shares in SK Holdings, the company said. The combined company's total asset value will be Won13.2tn ($12.2bn).

SK Group has more than 80 divisions generating combined annual revenues of Won165.5tn. SK C&C already owns a one-third stake in SK Holdings, which in turn holds stakes in other SK Group units such as SK Telecom and SK Hynix.

Analysts said the deal alleviated concerns that the complicated existing structure, in which SK C&C was controlling the group's holding company, could be shaky.

"The merger has been widely expected for years as a controlling company on top of the holding company was seen as problematic," said Michael Na, strategist at Nomura. "The deal is positive in that it clears a controversial issue on SK's governance structure."

SK Group is still widely believed to be controlled by jailed billionaire Chey Tae-won, although he resigned as chairman of the group and several of its affiliates last year.

Chey is serving a four-year prison term for stealing Won45.1bn from group companies, however he was the best-paid South Korean executive of 2013, receiving an aggregate salary of Won9.4bn and bonuses of Won20.7bn.

Chey received a Won8bn pay packet in 2013 from the company's IT unit, although it was one of the SK Group companies he defrauded.

The deal is also designed to avoid the increasing scrutiny of intra-group deals, analysts said. Chey owns nearly 33 per cent of SK C&C - a company whose share price has tripled over the past three years as the IT service provider has been a main beneficiary of intra-group deals.

The government has put pressure on conglomerates to cease intra-group deals and give more business opportunities for small and medium-sized companies. Analysts estimate that intra-group deals accounted for nearly 40 per cent of SK C&C's 2013 revenues.

Such pressure on corporate governance has prompted conglomerates including LG Group to move into a holding company structure but analysts said it would still be difficult for Samsung Group, the country's largest chaebol, to simplify its complex ownership structure.

"Samsung's cross-shareholdings are too complex to simplify . . . I don't expect any meaningful changes for the time being, although rumours about it are rampant in the market," said Mr Na.

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