Hynix Sale Pits SK’s Phone Billionaire Versus STX’s Ship Magnate

July 08, 2011, 6:24 AM EDT By Jun Yang and Kyunghee Park

July 8 (Bloomberg) -- SK Telecom Co. and STX Group plan to make competing bids for a controlling stake in Hynix Semiconductor Inc. in the biggest sale of a South Korean technology asset in more than a decade.

The mobile-phone unit at billionaire Chey Tae Won’s SK Group and shipping magnate Kang Duk Soo’s STX submitted letters of interest before the 4 p.m. deadline today, according to separate statements from the companies. There were no other bidders, said Korea Exchange Bank, which is leading nine financial institutions to unload their Hynix stake, worth 2.4 trillion won ($2.2 billion) based on current market prices.

The bidding will pit Chey against Kang for control of the second-largest producer of chips known as DRAM, a market marked by boom-and-bust cycles and multi-billion-dollar capital investments each year. The sale, Hynix creditors’ fourth attempt in two years, has raised concerns Korean business groups known as the chaebol are reviving practices of over-expansion that led to the financial crisis in the late 90s.

“The market’s not happy because there’s no logical reason for SK to claim they can run a semiconductor company,” said Shaun Cochran, head of Korea research at CLSA Asia-Pacific Markets. Same applies to STX, with the only difference being “SK Telecom at least has cash to do it,” he said.

While supporters praise the chaebol for pulling the country out of poverty from the 1950 to 1953 Korean War and transforming it into Asia’s fourth-largest economy, the International Monetary Fund cited the debt-driven chaebol model as part of the reason the nation’s economy landed in a financial crisis at the end of 1997.

Textiles Beginnings

The phone carrier’s shares fell 7.1 percent this week and closed at an eight-year low in Seoul trading, while STX Corp. dropped 6.9 percent. The benchmark stock index climbed 2.6 percent.

SK Group, whose roots stretch back seven decades when it was a textiles maker, has grown into the nation’s third-largest chaebol with 86 units sprawled across energy, financial services and telecommunications. Chey’s wealth is estimated at about $2 billion, making the 50-year-old South Korea’s seventh-richest man, according to Forbes magazine.

SK Telecom is seeking to diversify its businesses by buying Hynix and will make a final decision on whether to proceed after “thorough reviews,” the Seoul-based phone carrier said in a statement.

With 1.5 trillion won in cash as of the end of the first quarter, SK Telecom won’t likely have trouble financing a purchase of Hynix, Choi Yoon Mee, an analyst at Mirae Asset Securities Co., said in a note today.

Largest Tech Deal

The stake of about 15 percent being sold by shareholders led by Korea Exchange Bank would make the buyer the biggest shareholder in the chipmaker.

The disposal of the stake would also be the largest share sale of a South Korean technology company since July 1999, when Hynix bought a majority holding in Hyundai Microelectronics Co. for 2.56 trillion won, according to data compiled by Bloomberg.

SK’s plan to spend that money on a costly, unrelated business isn’t winning over investors, Cochran said.

“What foreign investors definitely would like them to do is to pay that capital out in their dividends, but obviously they’re reluctant to do that,” he said.

Hynix wouldn’t be SK Telecom’s first investment in a business straying from its main operations. In 2003, the company bought a stake in Posco as part of a deal to stop the nation’s biggest steelmaker from selling its stake in the carrier, which was valued at $942 million at the time.

Middle East Fund

STX has grown into South Korea’s 14th-biggest business group since it was founded by Kang, 60, a decade ago through acquisitions. STX Offshore was taken over by the group in 2001 and STX Pan Ocean Co., the nation’s biggest commodities shipping company, was bought in November 2004.

While it acquired Aker Yards ASA, Europe’s largest shipyard, for about 1.4 trillion won in 2007, buying Hynix would be STX Group’s biggest acquisition.

STX, which plans to team up with a unidentified Middle East sovereign wealth fund, won’t need to borrow to pay for the stake, according to Vice Chairman Lee Jong Chul. It also plans to sell assets to raise funds for the deal, he said.

Ryu Jae Han, chief executive officer of state-run Korea Finance Corp., said in October that shareholders including his corporation wouldn’t object to a buyer partnering with a foreign investor.

End of Bank Supervision

STX Group’s five listed units had cash and equivalents of about 2.9 trillion won at the end of March, according to their financial statements.

For Hynix, the sale may result in the end of a decade under bank supervision. Hynix was bailed out by creditors including Korea Exchange Bank and Woori Bank in 2001 after they swapped debt for equity.

Still, Hynix’s competitiveness, which allowed it to avoid a loss this year amid an industry downturn, may make it an attractive asset for SK Telecom and STX, which are looking for new sources of revenue, said James Song, a Seoul-based analyst at Daewoo Securities Co.

Hynix posted record sales and profit in 2010, helped by cost cuts and demand for chips used in mobile devices, leading the company to pay a cash dividend to investors for the first time. It reduced debt by more than 1 trillion won last year and had more than 2 trillion won in cash, according to the company.

The chipmaker plans to spend about 3.4 trillion won this year expanding production and upgrading factories, after investing 3.4 trillion won in capital expenditure in 2010.

“Hynix’s constant need for capital expenditure deterred potential buyers in the past,” Song said.

--Editors: Brett Miller, Young-Sam Cho, Anand Krishnamoorthy

To contact the reporters on this story: Jun Yang in Seoul at Jyang180@bloomberg.net; Seonjin Cha in Seoul at scha2@bloomberg.net.

To contact the editor responsible for this story: Young-Sam Cho at ycho2@bloomberg.net.

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