SK On bidders weigh growing risks of battery makers

Some of the four shortlisted bidders for South Korea's SK On Co. recently went back to the drawing board to assess the value of the world's No. 5 electric vehicle battery maker, before making their final offers next month for 3 trillion won ($2.4 billion) in new shares.

Rising prices of raw materials such as lithium, nickel and cobalt are prodding them to amend their valuations for SK On, alongside cooling investor sentiment toward the battery industry, according to people familiar with the situation on April 17.

In February of this year, the EV battery maker narrowed bidders for its new shares to four candidates -- BlackRock, The Carlyle Group, KKR and Singapore's GIC. 

At the time, SK On valued itself between 35 trillion won and 40 trillion won, above the bidders' consensus estimate of 25 trillion-30 trillion won. 

The company plans to pick two final investors to raise around 3 trillion won in total, on top of an additional 1 trillion won to come from three domestic private equity firms. Their investment conditions will be identical.

"At the start of this year, investor sentiment toward rechargeable batteries was at its peak," said a source at one of the shortlisted bidders.

"But as battery makers' share prices have been on the decline and raw material prices have spiked, we are unsure now of how much we need to put down (on SK On)," he told Market Insight, the capital market news outlet of The Korea Economic Daily.

The key risk is the soaring price of lithium. The mineral used to make the cathode material in batteries has seen its price skyrocket 472% over the past nine months. Since the start of this year, the price of lithium has more than doubled to 469 yuan per kilogram. 

A sharp increase in other components such as copper foil, electrolyte and aluminum foil cast a pall over the company's value as well. The price changes of those components are hardly passed on to their customers, unlike key minerals such as lithium, nickel and cobalt.

SK On CEO Kim Jun acknowledged its challenging situation.

"Last year, we expected to swing to the black in 2022," Kim said at the company's annual general meeting (AGM) last month.

"Now the automotive semiconductor supply issue, rising raw material prices and new hiring (expenses) are working against us."

DELAYS IN FUNDRAISING?

The wider discrepancies in SK On's valuations could delay what will likely become the country's largest investment during the first half of this year. 

Shares in its bigger rival LG Energy Solution Ltd. have tumbled around 30% from their all-time high of 598,000 won hit in late January, following their glitzy market debut earlier in that month.

Making investors further cautious about SK On, its CEO Kim told the AGM that the EV battery supplier would not go public until 2025 to focus on enhancing its value. 

For its new financial investors (FIs), that means their money could get locked up for at least three years.

Moreover, SK On will unlikely provide any guarantee on the FIs' future exits from the company. 

In a presentation made to FIs earlier on, SK was said to have shared its four-year spending plans worth 30 trillion won on facility expansion. 

In detail, it plans to raise 20 trillion won through bond issues and borrowings; 3 trillion-4 trillion won in equity financing from global FIs; 1 trillion-2 trillion won from domestic FIs; and the remainder from public offerings or other investors. 

If the company goes ahead with the financing plans, bondholders and lenders will eventually have priority over equity investors. 

In light of this, some bidders are proposing they buy preferred stocks convertible into ordinary shares, with their term sheets containing a clause that if the company fails to go public by a specified year, it should sharply step up interest payments to the preferred shareholders. 

One of the four shortlisted investors, KKR in 2021 injected 2.4 trillion won into buying preferred shares of SK E&S Co., a city gas supplier.

Another SK Group unit SK Ecoplant Co. recently raised about 800 billion won in a pre-IPO share sale, with the condition attached that it would pay sharply higher interest to the new investors unless it goes public during a certain period of time.

Write to Jun-Ho Cha at chacha@hankyung.com
Yeonhee Kim edited this article.