SK Innovation Co Ltd’s shares experienced a significant increase in value recently as reports emerged regarding a potential merger with SK E&S, another entity within the same group. Although SK Innovation has not confirmed any concrete plans yet, the company has acknowledged that it is considering various strategic options.

Citi, a prominent investment firm, has maintained a Neutral rating on SK Innovation while keeping a price target of KRW120,000.00. The firm recognizes the possible advantages of merging with SK E&S, especially in terms of the latter’s steady revenue streams from city gas distribution, LNG value chain, and independent power production (IPP) activities. Such a merger could potentially alleviate SK Innovation’s concerns about financing its battery capital expenditures.

However, Citi also highlights a key issue for SK Innovation’s minority shareholders, which is the risk of share dilution. The challenge lies in determining the appropriate share swap ratio between the two entities. SK E&S reported an EBITDA of approximately W2 trillion per year for 2022 and 2023.

Citi’s analysts project that the combined entity’s net debt-to-equity ratio after the merger could improve to around 73%, compared to SK Innovation’s current 81% and SK E&S’s 47%. Moreover, the net debt to EBITDA ratio could potentially decrease to about 4.2 times from SK Innovation’s existing 5.6 times.

Despite acknowledging the potential benefits of the merger, Citi remains cautious until more details are revealed. The firm points out that a significant valuation gap between SK E&S and SK Innovation might continue to impact the latter’s stock performance. It is essential to note that the potential merger is still in the review stage, and definitive decisions have not been made yet.

As investors and industry analysts eagerly await further updates on the merger talks between SK Innovation and SK E&S, it is crucial to consider the potential implications for both entities and their stakeholders. The outcome of this strategic move could reshape the competitive landscape in the energy sector and have a lasting impact on the companies involved. Stay tuned for more developments on this evolving story.