SK Innovation Co. Ltd., the single shareholder of SK Lubricants Co. Ltd., has put the lube base oil supplier up for sale as the parent company seeks new funding to expand the business of rechargeable batteries used in electric vehicles (EVs).
SK Innovation, an oil refiner and EV battery maker, has recently selected Citigroup Global Market Securities to lead the planned sale and has begun tapping potential buyers, according to oil refinery industry sources on Aug. 13.
The stake size on offer is up to 49%. But if a prospective buyer wants management rights, SK Innovations may sell the entire unit estimated to be worth 3 trillion-4 trillion won ($2.5 billion-$3.4 billion).
SK Innovations may opt for competitive bidding to boost its price tag to as high as 5 trillion won, the sources said.
The planned sale comes after its previous attempts to make public SK Lubricants in 2013, 2015 and 2018 fell through due to a valuation gap between the company and investors. Its 2015 negotiations with Seoul-based private equity firm MBK Partners to sell SK Lubricants also broke down. MBK had reportedly valued SK Lubricants at 3 trillion won, below SK’s estimate.
Late last year the US energy giant ExxonMobil showed interest in buying a stake in the lubricant maker. But the talks stalled for unknown reasons.
The parent SK Group has been streamlining core oil refining and chemical operations to shift its focus towards new businesses such as EV batteries. Last year, SK Networks Co. Ltd., the trading unit of the third-largest South Korean conglomerate, sold its gas station business to a domestic consortium for around 1.3 trillion won.
Other SK Group units have also shed core businesses to secure funding for potential acquisitions. Last year, the chemical unit SKC Co. Ltd. raised about $560 million by selling part of its chemical operations to a joint venture with Kuwait’s state-owned Petrochemical Industries Company (PIC). SK E&S exited from Hong Kong-listed China Gas Holdings for $1.5 billion earlier this year.
If the stake sale succeeds, SK Innovation will secure new funding to expand environmentally friendly businesses through acquisitions. Early this year, Moody’s downgraded SK Innovation’s credit rating to Baa2, citing cash flow risk.
To shore up its business, SK Lubricants has diversified its raw material sources beyond the home market by establishing joint ventures with Japan’s JX Nippon Oil & Energy and Indonesia’s PT Pertamina.
POTENTIAL BIDDERS, OUTLOOK
Industry observers expect global oil refiners such as Chevron Corp, BP plc, Total S.A. and ExxonMobil to show interest in the Korean rival company, given its strong market position in the high-quality lube base oils used for automobiles.
Among domestic financial investors, MBK Partners and Hahn & Company are speculated as possible candidates given the estimated deal size. The regulations banning non-oil refiners from entering the lube base oil market may temper private equity firms’ interest in the auction.
SK Lubricants has continued to post profits since it was spun off from SK Innovation in 2009.
On the downside, SK’s high dependence on the lube base oil business and the supply glut in the market could dampen interest in the Korean oil refiner. The rise of electric vehicles poses a threat to the lubricant industry, given that electric cars use less grease than combustion vehicles.
A valuation gap between the seller and investors will likely remain a hurdle to the planned sale. Its net profit declined to 215.7 billion won in 2019 versus 334.3 billion won a year earlier on flat sales. Its EBITDA came to 430 billion won last year.
By Ri-ahn Kim and Jun Ho Cha
<Edited by Yeonhee Kim>