SK Telecom to Buy Stake in Hynix

SK Telecom Corp Ltd (SKM - Analyst Report) has agreed to buy a 21% stake in Hynix Semiconductor Inc., the second largest chipmaker, for KRW 3.427 trillion ($3.04 billion).

SK Telecom was the sole bidder for the purchase after STX Corp. withdrew its bid in September, citing market uncertainties and financial woes.

The company would purchase a 15% stake from the issuance of new Hynix shares and the remaining 6% from Hynix creditors. The terms of the deal are yet to be finalized as SK Telecom plans to conduct due diligence in December. The deal is expected to be completed by the first quarter of next year.                                                                                

The purchase would make the South Korean telecom giant the largest shareholder of the memory chipmaker. Upon finalization, the deal would represent SK Telecom’s biggest acquisition to date. The transaction would introduce opportunities of growth in the chip market and diversify the company’s fixed-line and wireless businesses globally, helping it overcome the limited prospects in the domestic wireless market.

Wireless competition is at its peak in the South Korean mobile market. Nevertheless, SK Telecom continues to rule the Korean wireless market, thanks to its diverse offerings.

Along with the computer-memory chips, we believe strong smartphone offerings, 3G network, advanced 4G Long Term Evolution expansions and the cloud computing business will fuel growth at SK Telecom. Moreover, the company is poised to benefit from the growing Wi-Fi and data femtocell services.

However, chip production might increase SK Telecom’s spending further. Plus, the company continues to spend heavily on improving its network visibility to contain customer churn amid stiff competition from its rivals. The increased spending might strain the company’s financials.

Further, SK Telecom’s aggressive smartphone rollout plan connotes higher marketing expenses (including the cost of advertising and handset subsidies), which may put pressure on the bottom line in the near term.

We are maintaining our long-term Neutral recommendation on the stock. For the short term (1–3 months), the stock retains the Zacks #3 (Hold) Rank.

Read the full analyst report on SKM