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Billionaire Chey Tae Won Sees Shareholder Losses With Hynix Bid: Real M&A

SK Telecom Co., the worst-performing telecommunications stock in east Asia, has decided that the best way to increase shareholder value is to pursue a bailed out chipmaker and a bankrupt video-rental chain.

South Korea’s biggest mobile-phone operator said this month it will bid for a stake in Hynix Semiconductor Inc. (000660), the computer-memory chipmaker rescued by its lenders in 2001. The decision comes after Seoul-based SK Telecom lost an auction to buy Blockbuster Inc. (BLOAQ), which was sold in liquidation in April. SK Telecom, which has declined 35 percent in dollars in the past five years, doesn’t have any overlapping businesses with either Hynix or Blockbuster, according to data compiled by Bloomberg.

The interest in Hynix has cost SK Telecom’s shareholders more than a billion dollars as the company tries to stem its first sales decline on record in a market where there are more mobile-phone subscriptions than people. Billionaire Chey Tae Won’s SK Group is pushing the phone unit into what could be its biggest investment, fueling concern South Korea’s family owned conglomerates, or “chaebol,” are reviving practices of over- expansion that fueled the Asian financial crisis in the 1990s.

“They are kind of desperate, but there are certainly better ways for them to spend their money” than Hynix, said Ronald Wan, a Hong Kong-based managing director at China Merchants Securities Co., which oversees about $1.5 billion. “I don’t see any sense in making that kind of transaction.”

Due Diligence

Jun Sung Chul, a spokesman for SK Telecom, said the company will make a “reasonable decision after accurate due diligence” for its Hynix bid. Park Seong Ae, a spokeswoman for Icheon, South Korea-based Hynix, declined to comment.

A group of nine creditors plans to sell all or part of a 15 percent stake in Hynix that it gained through a government- initiated bailout in 2001 after an industry slump.

SK Telecom and STX Group, the conglomerate led by shipping magnate Kang Duk Soo, 60, submitted letters of interest before a July 8 deadline. There were no other bidders, according to Korea Exchange Bank (004940), which is leading the sale. The stake is currently valued at about $2 billion, data compiled by Bloomberg show.

Since July 7, when the Seoul Economic Daily reported that SK Group was considering a bid for Hynix, shares of SK Telecom have lost nearly 10 percent and touched an eight-year low last week. The decline has wiped out 1.3 trillion won ($1.2 billion) from SK Telecom’s market capitalization in less than two weeks.

SK Telecom rose 0.4 percent to 144,000 won today, after saying it will buy back about 202 billion won of its stock in the next three months.

Mobile Penetration

SK Telecom, which gets 96 percent of its revenue from providing mobile-phone service, is turning to Hynix to boost growth as the nation’s carriers struggle to win more customers.

South Korea had 51.36 million mobile-phone subscribers at the end of March, more than the nation’s population of about 49 million, according to data compiled by SK Telecom. Analysts estimate that sales at SK Telecom will decrease 0.5 percent to 15.4 trillion won this year, data compiled by Bloomberg show. The decline would be the first since at least 1992.

“There aren’t many areas in the local telecommunication industry where SK Telecom can invest,” said Lee Jin Woo, a Seoul-based fund manager at KTB Asset Management Co., which oversees about $10 billion in assets.

SK Telecom last month became the nation’s first mobile- phone provider to agree with regulators to lower bills for consumers as the government tries to curb inflation. That agreement may cost it 413 billion won in operating profit next year, according to Tong Yang Securities Inc.

No Connection

Analysts estimate SK Telecom will earn 2.44 trillion won in operating income in 2012, data compiled by Bloomberg show.

While buying Hynix would let SK Telecom rely less on mobile phones, the rival bid from STX and the likelihood that SK Telecom will have to buy more than 15 percent may force the company to spend as much as 4 trillion won, Sam Min, an analyst at Morgan Stanley, wrote in a note to clients dated July 11.

South Korea’s fair trade law requires that holding companies own at least 20 percent of an affiliate’s outstanding shares. The purchase would “wipe out” SK Telecom’s net free cash flow and leave it with an additional 2 trillion won in debt, Seoul-based Min said.

“We were pretty frustrated” by SK Telecom’s bid for Hynix, said Kim Hue Jae, an analyst at Daishin Securities Co. in Seoul. “It involves a huge sum of money, and I really don’t see a connection between Hynix and their main business.”

At the end of March, SK Telecom had 5.6 trillion won in debt and 2.1 trillion won in cash and short-term investments, data compiled by Bloomberg show. It also generated more free cash than 99 percent of non-financial companies in the 779-stock Kospi index (KOSPI), the benchmark gauge of South Korean common equity.

History Lesson

Using SK Telecom’s cash pile to buy an unrelated business may show SK Group is putting the chaebol’s interest ahead of shareholders, according to China Merchants’ Wan.

Chaebol were originally modeled on Japan’s zaibatsu conglomerate system, and with the government’s support, came to control many of South Korea’s biggest businesses.

SK Group is run by Chey, 50, South Korea’s seventh-richest man with an estimated worth of about $2 billion, according to Forbes magazine. The conglomerate, whose roots stretch back seven decades when it began as a textiles maker, has grown into the nation’s third-largest chaebol with 86 units sprawled across energy, financial services and telecommunications.

While the chaebol helped transform South Korea into an industrialized economy after the Korean War, they were crippled as the Asian financial crisis in 1997 and 1998 pushed affiliates that borrowed too much money toward insolvency.

IMF Bailout

The debt-driven model was one reason that South Korea had to turn to the International Monetary Fund for a bailout in the 1990s as the financial crisis battered the economy.

Still, “the chaebol has an important part to play” in South Korean business even today, Wan said. “This may be why, even though the transaction doesn’t have synergy, they decided to go ahead” with the Hynix bid, he said.

Prior to announcing its interest in Hynix, SK Telecom bid $284.5 million for Dallas-based Blockbuster, which was once the world’s largest movie-rental chain and filed for bankruptcy in September. That was topped by Dish Network Corp.’s $320 million winning offer in April.

SK Telecom, which gets almost all its sales in South Korea, gave no explanation about why it wanted to buy Blockbuster.

Hynix and Blockbuster haven’t been the only targets that raised concern SK Telecom wasn’t putting its shareholders first.

‘A New Low’

Eight years ago, SK Telecom bought a stake in Posco (005490), South Korea’s largest steelmaker, from another member of the SK Group that needed to raise money. SK Telecom said at the time the purchase was part of a deal to keep Pohang, South Korea-based Posco from selling its holdings in SK Telecom.

The transaction triggered an 8.1 percent decline, slicing $1.2 billion from SK Telecom’s market capitalization in a single day, data compiled by Bloomberg show.

“We noted some improvement on the company’s investment decision-making but this deteriorated with the Blockbuster bid and has reached a new low with Hynix,” David Lee, an analyst at CLSA Asia-Pacific Markets in Seoul, said in a report July 11.

The Hynix stake would make SK Telecom the biggest shareholder in the world’s second-largest maker of memory chips used in everything from tablet computers to mobile phones, data compiled by Bloomberg show.

While Hynix reversed two years of losses that exceeded 5 trillion won to report a record profit last year, SK Telecom would be getting into a market marked by boom-and-bust cycles and multi-billion-dollar capital investments each year.

Hynix, whose profit tends to follow semiconductor prices up and down, will spend 3.4 trillion won on plants and equipment this year, it said in January. That’s more than five times the amount SK Telecom paid in dividends in 2010.

“If they buy it cheaply, there can be some positives,” said KTB Asset’s Lee. “But Hynix is a company that requires heavy investments. So for shareholders, it could mean a transfer of wealth.”

To contact the reporters on this story: Jun Yang in Seoul at; Weiyi Lim in Singapore at

To contact the editors responsible for this story: Daniel Hauck at; Young-Sam Cho at

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