SK Square's Razor-Thin Math to Keep Control of SK hynix

[Korea Financial Times, Jeong Chaeyun] SK Square has succeeded in solving a complex equation to protect its 20% stake in subsidiary SK hynix.

SK hynix's American Depositary Receipts (ADRs) closed their first day of trading on the Nasdaq on the 10th (local time) at $168.49, up 13% from the offering price of $149. The ADRs subsequently rose as high as $193.92 on the 14th before closing lower at $176.46 on the 15th — still 18.4% above the offering price.

The listing is the largest of its kind since Alibaba's 2014 IPO in the U.S. and Saudi Aramco's 2019 offering.
While the day was a celebratory one for the SK Group, parent company SK Square watched closely for another reason: as SK hynix issued a large volume of new shares, it became critical for SK Square to keep its controlling stake above the legal threshold required under the Fair Trade Act to maintain its status as a holding company. Riding the current AI-chip boom, SK hynix now accounts for 85% of the group's total market capitalization, effectively serving as the linchpin of SK Group's future.

Why SK Square's 20% Stake Matters

SK hynix decided to issue up to 17.79 million new shares, roughly 2.5% of its total outstanding shares, raising about KRW 40 trillion to be used entirely for capital expenditure (CAPEX).

Trading began with the Nasdaq listing on the 10th, but the actual payment for the offering and the issuance of new shares will proceed later this month.

The problem is that the large-scale capital increase would dilute major shareholder SK Square's stake to 20.0002% — just above the 20% threshold mandated under Article 18 of the Fair Trade Act (Restriction on Business Activities of Holding Companies, etc.), which requires a holding company to hold at least 20% of a listed subsidiary's shares to retain its holding company status.

SK Square's stake in SK hynix had stood at a relatively stable 20.5% as of the end of the first quarter of this year. During that period, SK hynix retired 6,605,501 treasury shares in response to exchangeable bond (EB) conversions, but also cancelled 15.3 million shares, lifting SK Square's stake by 0.4 percentage points from 20.1% at the end of the fourth quarter last year.
However, with SK hynix's decision to issue American Depositary Receipts (ADRs), the total number of outstanding shares will increase, making a decline in SK Square's stake unavoidable.

SK Square currently holds 146.1 million shares of SK hynix, against SK hynix's existing total of 712,702,365 shares. If SK hynix issues the planned 17.79 million new shares, its total share count will rise to 730,492,365. Dividing SK Square's shareholding by the post-offering total brings its stake down to 20.0002%.

With virtually no room left in SK Square's stake, observers say any future roadmap for SK hynix to raise additional capital in the U.S. could be constrained by shareholding requirements under the Fair Trade Act.

The market is watching closely SK hynix's disclosed plans for "follow-on ADR issuances." Further capital raising in the U.S. capital markets to respond to memory market volatility would inevitably dilute the stake further.

But with only 0.0002 percentage points of buffer left in SK Square's stake, any additional capital increase could risk violating the Fair Trade Act.

Precision ADR Issuance Combined With Treasury Share Cancellation

To preempt these concerns in the capital markets, SK Square and SK hynix have already built in safeguards by combining a precisely calibrated ADR issuance size with a treasury share buyback-and-cancellation program at the subsidiary.

The two companies calculated the size of the Nasdaq offering itself with precision to ensure SK Square's stake would not fall below 20%. SK hynix's registration statement filed with the U.S. Securities and Exchange Commission (SEC) states that the maximum offering size was determined with consideration for the requirement that its largest shareholder, SK Square, must hold at least 20% of SK hynix's total outstanding shares under the Fair Trade Act.

At the same time, a mechanism is in motion to restore SK Square's stake through SK hynix's own shareholder-return program. If SK hynix buys back and cancels treasury shares, reducing the total share count (the denominator), SK Square's stake will rise automatically even if the number of shares it holds does not change.

Building a buffer above the mandatory threshold through such share cancellations would give SK hynix room for further ADR issuances and future capital-raising in years ahead.

An SK Square official said, "Even if additional capital raising takes place going forward, risks such as losing holding company status will be thoroughly managed," seeking to ease market concerns. The official explained that under current law, a breach of the shareholding requirement would force SK hynix to be excluded as a consolidated subsidiary, and that this offering, too, was calibrated within the optimal range to preserve SK Square's holding company status.

The company said that even as additional capital is raised in the future, it will organically link the schedule of treasury share buybacks and cancellations with the scale of new share issuances to defend the legal 20% threshold. This is interpreted as an effort to categorically block any possibility of SK hynix, its core asset, being excluded as a subsidiary.

Chances of a Merger With SK Inc.: "Zero"

Amid concerns over weakening control of SK hynix and controversy over SK Square being "passed over" as the group's intermediate holding company, some in the investment banking (IB) industry have floated the possibility of an early merger between top holding company SK Inc. and SK Square.

The reasoning is that if SK Square's role as the investment hub of the intermediate holding structure comes into question, merging SK Square with SK Inc. outright — simplifying the governance structure and directly strengthening control over SK hynix — could serve as a fundamental solution.

An investment banking industry source said, "SK Square's market capitalization is currently more than four times larger than that of its parent, SK Inc.," adding that "a merger itself is not feasible due to capital markets regulations and concerns over the erosion of shareholder value." According to Naver Pay Securities, as of early this month, SK Square's market capitalization stood at KRW 183.4222 trillion, compared with KRW 46.2567 trillion for SK Inc.

Ultimately, analysts say SK Square has opted for the direct approach of defending the 20% stake threshold in the short term — linking SK hynix's treasury share cancellation plans and the scale of its U.S. capital-market offerings to the parent company's regulatory requirements — rather than pursuing a long-term merger or an artificial restructuring of its governance.



Jeong Chaeyun (chaeyun@fntimes.com)