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Activist fund urges SK Chemicals to sell part of stake in SK Bioscience

Metrica Partners estimates SK Chemicals’ share price discounted by more than 85%

By Sep 08, 2021 (Gmt+09:00)

A SK Bioscience researcher is testing medicines to develop vaccines.
A SK Bioscience researcher is testing medicines to develop vaccines.

A Singapore’s activist fund urged South Korea’s SK Chemicals to sell some of its shares in SK Bioscience Co., saying its corporate values has not been fully reflected in SK Chemicals’ share price.

The request, however, was seen a move to solve issues related to parent-subsidiary listings, South Korean stock market sources analyzed. The parent-subsidiary listings are practices for a parent company to raise money for a subsidiary through an initial public offering (IPO) of the unit.

The parent company can use the fund for new business, but its shareholders will suffer a discount in its share prices as its key subsidiary is separated. In many cases, the market valuation of a parent company and a subsidiary is overestimated because the subsidiary’s value is also reflected in the parent firm.

SELL STAKE AND PAY DIVIDEND

Metrica Partners Pte., a Singapore hedge fund, sent on Sept. 8 a letter to SK Chemicals’ board of director, urging the company to sell 18.3% stake in SK Bioscience for 4.2 trillion won ($3.6 billion) and pay a special dividend to shareholders.

The letter helped SK Chemicals’ share close up 8.8% at 295,000 won, far outpacing a 0.8% fall in the wider Kospi. Its preferred stock also surged 19.9% to 162,500 won.

The ordinary share price represented an 85% discount, given Metrica’s estimates of SK Chemicals’ total value at 1.59 million won per share including a 1.49 million won per share value of its 68.43% stake in SK Bioscience, according to the letter.

“SK Chemicals does not need to maintain a 68.43% stake in SK Bioscience, in Metrica’s view. The stake so completely dominates SK Chemicals’ valuation that it renders the other businesses (chemicals, pharmaceuticals) totally insignificant,” said Metrica that has less than 5% stake in SK Chemicals.

“Metrica therefore urges SK Chemicals to partially sell down its SK Bioscience stake upon the expiry of the share lockup on 18 September,” it added in the letter.

SK CHEMICALS FAIL TO FULLY REFLECT COVID-19 VACCINE

SK Bioscience listed on the Kospi in March after a split-off from SK Chemicals in 2018. Without its listing, SK Chemical could have fully reflected bullish factors of SK Bioscience such as the development of COVID-19 vaccines. But the value of SK Chemicals’ stake in SK Bioscience has been discounted since the IPO.

SK Bioscience’s shares surged 84% in August as it has received approval from South Korea’s Ministry of Food and Drug Safety (MFDS) for phase 3 clinical trials of its COVID-19 vaccine candidate GBP510. That compared with a 14% gain in SK Chemicals’ stocks.

It also happens to Samsung Biologics. Even if the company’s share prices and earnings rose, shares in Samsung C&T Corp., its holding company, remained sluggish.

KEY FACTOR OF KOREA DISCOUNT

South Korean stock market sources expected more of local companies to face similar issues as more companies listed unlisted affiliates to raise funds for growth in subsidiaries since the breakout of the COVID-19.

KakaoBank Corp., the mobile banking unit of South Korea’s online messaging app giant Kakao Corp. went public last month, for example. SK IE Technology Co., SK Innovation Co.’s battery materials maker, was also floated in May. Hyundai Heavy Industries Co., wholly owned by Korea Shipbuilding & Offshore Engineering Co. (KSOE), will be listed on Sept. 16. Hyundai Heavy Industries Holdings Co. is a holding company of KSOE.

“A circular shareholding was a main factor of the Korea discount in the past. But the parent-subsidiary listings will be the key factor from now on,” said a financial investment industry source, referring to South Korean shares' undervaluation compared to their global peers.

Activist funds have been targeting Japanese companies due to issues related to the parent-subsidiary listings.

Oasis Management Company Ltd. urged Japan’s Pasona Group Inc. to improve corporate governance in late 2017, saying the group’s value was about a seventh of the market capitalization of its subsidiary Benefit One Inc, for example.

Some Japanese companies took their own measures to solve the issues linked to the parent-subsidiary listings. Late last year, Nippon Telegraph and Telephone Corp (NTT) bought all of the stake in its wireless carrier business NTT Docomo Inc. and delisted it.

Write to Sulgi Lee at surugi@hankyung.com

Jongwoo Cheon eidted this article.

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