(EDITORIAL from Korea Times on July 19)

SK Group announced the merger of SK Innovation and SK E and S on Wednesday, paving the way for the creation of a "super energy" company with assets surpassing 106 trillion won ($76.5 billion). The boards of the two firms approved the merger during separate meetings, primarily aimed at salvaging SK Innovation's struggling battery affiliate, SK On. Since its inception in 2021, SK On has suffered continuous financial losses for 10 consecutive quarters, accumulating a deficit totaling 2.6 trillion won. The merger is part of a broader strategy to rebalance SK Group's portfolio. SK Innovation specializes in oil exploration, crude oil refining and petrochemical production, with subsidiaries including SK Energy and SK Geocentric. The merger with SK E and C, which focuses on renewable energy and clean hydrogen power, is expected to bolster SK Innovation's energy portfolio. The exchange ratio was set at 1.2 for SK Innovation shares for each SK E and S share. The companies plan to hold shareholders' meetings in August to finalize the merger, which, if approved, will create a gigantic energy conglomerate by November, with an annual turnover of up to 90 trillion won. The merger is anticipated to generate significant synergy in oil exploration and resource development. For instance, SK Innovation's capability of extracting sulfur dioxide and manufacturing liquefied natural gas (LNG) will be complemented by SK E and S's expertise in storing and generating electricity from LNG. This integration will streamline their operations across the gas value chain. The merger is also significant as it aligns with South Korea's strategic plan to explore potential oil fields in the East Sea, as announced by the Yoon Suk Yeol administration. Although the petroleum market is expected to slow until around 2030, the gas market is projected to grow steadily. The merger will position SK Innovation to play a crucial role in these developments. The merger will have positive effects for SK Innovation, in particular, in its bid to shed the hithert o negative image of being slow to innovate. Market experts say SK Innovation's value will pick up impetus once the envisaged merger gains traction. They say the merger will help enhance financial stability and boost the growth potential of the firms thanks to the projected expansion of business portfolios. Besides this, SK Group's management control will not be impacted by the merger, as SK Corporation will remain as the major shareholder after the merger. One risk involves financial investors who put their money in SK E and S. For example, KKR, a private equity firm, owns 3.14 trillion won worth of SK E and S shares. Since these are convertible preferred shares, they may entitle shareholders to cash compensation. However, whether this compensation is actually provided will depend on the terms of the merger and the potential listing of SK On on Nasdaq. The two companies expect the merger will generate a synergy effect of 2.1 trillion won in EBITDA (earnings before interest, taxes, depreciation and amortizati on) by 2030. SK Innovation's board also approved merging SK Trading International and SK Enterm with SK On to enhance the financial soundness of the battery unit. The merger also comes amid SK Chairman Chey Tae-won's ongoing post-divorce dispute with his former wife Roh So-yeong amid growing negative public opinion. Despite this, the merger is seen as a necessary step for SK Group to remain competitive in a rapidly evolving business landscape. SK Innovation CEO Park Sang-kyu stated that the merger represents structural and fundamental innovation, aiming for sustainable growth in the energy sector. He said the new firm will become a leading total energy and solutions company in Korea. SK E and S CEO Choo Hyung-woo also said, "The recent merger will provide both companies with future growth engines to lead the global energy market." The merger is a crucial move for SK Group to navigate current challenges and seize future opportunities. The two firms should maximize the merger's potential to lead the global e nergy and resources markets and solidify their position as Korea's primary utility company. Source: Yonhap News Agency