December 22, 2024

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SK Square's headquarters at SK T‑Tower in central Seoul (SK Square)

London-based hedge fund Palliser Capital was recently found to have held a stake of more than 1 percent in SK Square, the investment arm of SK Group, for years, triggering speculation about another round of activist campaigns against the nation’s second-largest conglomerate.

According to industry sources on Thursday, the fund -- founded by Chief Investment Officer James Smith, who previously worked at Elliott Investment Management -- held several meetings with SK Square executives recently to discuss the company’s investment strategy and shareholder return policy.

Growth in Palliser’s interest comes at a crucial juncture when SK is carrying out a comprehensive restructuring of its business portfolio in an apparent move to secure cash without harming Chairman Chey Tae-won’s control over key affiliates.

In recent months, the group merged the two energy firms SK Innovation and SK E&S into a new entity to improve efficiency while selling off non-core affiliates and assets such as the gas supplier SK Specialty and the automotive rental service SK Rent-a-Car.

“Palliser sees high potential in SK’s ongoing business restructuring,” an industry official close to the matter told The Korea Herald. “With Chairman Chey’s main assets in the form of shares in SK Inc., it would be necessary for SK Inc. to maximize its value, and, by extension, the value of its subsidiaries.”

He added, "Among SK Inc.’s assets, SK Square appears to be the most obvious and easiest option for Palliser to unlock value. The fund finds the value uplift potential to be tremendous.”

SK Square is the largest shareholder of the group’s crown jewel, SK hynix, with a 20.1 percent stake. SK Inc., the holding unit, owns a 31.5 percent stake in SK Square. Chairman Chey controls SK hynix with his 17.9 percent stake in SK Inc.

SK hynix is the sole supplier of advanced AI chips for US chip giant Nvidia. Largely buoyed by strong sales of high bandwidth memory or HBM chips, the chipmaker reported an earnings surprise in the third quarter of this year with 17.5 trillion won ($12.6 billion) in sales and 7.3 trillion won in operating profits.

SK Square’s market capitalization, however, remains at about $8.5 billion, less than half the value of its stake in SK hynix, worth about $20 billion. After a media report on Palliser’s stake in the company, SK Square shares soared more than 8 percent over the past week alone.

Sources said the meetings between Palliser and SK Square have been “friendly” so far but it remains to be seen whether the activist fund will turn hostile to put more pressure on the management. Reports say Palliser is asking for a new earnings-based reward system for both top executives and shareholders.

In the meantime, an increasing number of Korean firms have been facing fresh activist campaigns in recent months. Singapore-based Flashlight Capital Partners recently urged KT&G, the nation’s tobacco monopoly, to spin off its red ginseng affiliate, while Korea’s Align Partners is upping the ante against Doosan Group amid the conglomerate’s ongoing business restructuring.

“The market caps of listed companies could fall amid a prolonged economic slowdown, allowing activist funds to seek opportunities,” said an official from the Federation of Korean Industries, one of the major business lobbies here.

“Many activist campaigns demand higher dividend payouts. If the campaigns succeed, the payouts would be pulled from funds allocated for investment and employment, limiting their long-term growth.”

By Im Eun-byel (silverstar@heraldcorp.com)