Activist fund Palliser demands SK Square draw up value-boosting measures

UK-based activist fund Palliser Capital Ltd. is calling on SK Square Co., the investment arm of South Korea’s second-largest conglomerate SK Group, to implement corporate value-boosting measures, including increased share buybacks and heavier investment in promising sectors.

The request comes after the UK hedge fund acquired a more than 1% stake in SK Square over the past couple of years – a move that has placed the London-based fund among SK Square’s top 10 shareholders.

Palliser questions the value of SK Square, which owns about 20% of highflying artificial intelligence chip maker SK Hynix Inc. as its largest shareholder, according to a Wall Street Journal report on Wednesday.

SK Hynix’s shares, driven by strong demand for the company’s key AI chip, high-bandwidth memory (HBM), have risen 36% this year, which helped pull SK Square’s shares up 64% year to date.

Even so, SK Square trades at a yawning discount to the value of its underlying holdings, especially its stake in SK Hynix, worth around $20 billion, more than twice the $8.5 billion market value of SK Square.

Citing unidentified sources, the WSJ reported that Palliser has had discussions with SK Square about reducing that discount through more investment and spending, including accelerating the company’s share buyback program.

SK Square has already repurchased $73 million worth of its own shares this year.

Palliser has also pushed to add board members with more asset-management experience and to tie executive pay to company performance, according to the report. The hedge fund wants SK Square to lower its capital costs by using more debt.

NOT PURSUING MANAGEMENT CONTROL

Palliser was launched in 2021 by James Smith, who headed the Hong Kong operations of Elliott Investment Management. The firm oversees more than $1 billion and recently urged changes at other Korean companies, including Samsung C&T Corp., the de facto holding company of the Samsung Group.

The discussions between SK Square and Palliser have so far been amicable.

Sources said SK Square has been exchanging views with Palliser regarding long-term strategic direction and shareholder return policies.

“Given the size of Palliser’s stake in our company, the UK fund isn’t pursuing SK Square’s management rights,” said an SK Square official.

“We plan to implement measures to increase shareholder value, such as increasing the value of the existing portfolio, making new investments, securitizing non-core assets and increasing shareholder returns, as suggested by Palliser,” he said.

On Wednesday, SK Square shares closed down 1.6% at 85,000 won, underperforming the benchmark Kospi index’s 0.9% decline. SK Hynix ended 2.2% lower at 188,700 won.

Spun off from Korea’s top mobile carrier SK Telecom Co. in 2021, SK Square is SK Group’s intermediate holding company, essentially an investment firm seeking new opportunities in non-telecom sectors.

Last year, SK Square jointly set up a 100 billion won ($77 million) investment vehicle, TGC Square, with SK Hynix and other partners – Shinhan Financial Group and LIG Nex1 Co.

VALUE-UP MEASURES

After investing in growth companies, SK Square has been implementing various value-up measures to increase its corporate value.

Currently managing about 20 portfolio corporates, SK Square has realized some capital gains through divestments while looking for new target firms.

It has invested in business sectors such as the metaverse, agricultural technology and cryptocurrency.

In June 2023, SK Square liquidated Grab Geo Holdings, a joint venture with Grab Holdings Ltd. by selling its entire stake in the Southeast Asian ride-hailing startup.

SK Square recently installed a new chief executive, Han Myung-jin, who plans to reshape the company’s investment portfolio to increase investments in the semiconductor industry.

SK Square, which holds around 1 trillion won ($724 million) worth of cash and cash equivalents, is expected to invest significant capital in Korean and overseas semiconductor industries as the chip business is the parent group’s new growth driver.

KOREA DISCOUNT VS CORPORATE VALUE-UP PROGRAM

Korea has long suffered from the so-called Korea discount – the tendency for stocks to trade more cheaply than in other similar markets.

Analysts said domestic companies’ dubious shareholder return policy, including the relatively low dividend ratio, as well as geopolitical risks involving North Korea, are often cited as Korea discount factors and a key reason for Asia’s fourth-largest economy's absence from MSCI's advanced market index.

In February, the government launched its “corporate value-up” program to encourage companies, to be more shareholder-friendly.

Last month, Korea’s securities exchange operator, Korea Exchange, also launched a new corporate value-up index, a key plank for the government’s push for better corporate governance and improved shareholder returns.

The Korea Value-up Index is composed of 100 listed “best practice” companies, including big-cap blue-chip companies such as Samsung Electronics Co., SK Hynix, Hyundai Motor Co. and Kia Corp. as well as “new faces” such as BH Co. and Kyung Dong Navien Co. that comply with the government’s corporate value-up program.

Write to Hyeon-woo Oh at ohw@hankyung.com

In-Soo Nam edited this article.