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SK Broadband Moves Into SKT’s Fold

Mobile giant SK Telecom (SKT) is well placed to extend its reach across Korea’s pay-TV and mobile networks, after moving to acquire the 49.4% it does not own of fast-growing IPTV & broadband player, SK Broadband (SKB).

The deal promises more long-term growth and synergies for the Korean mobile leader, which can up the competitive ante with new bundles of mobile, fixed broadband, IPTV and telephony.

The company also stands to benefit from improved economics of scale, gained by combining a number of functions across several affiliates.

Longer-term, SKT may bolster its video and broadband presence further by buying various cable operator assets.

These include MSOs such as C&M, which is on the block and has more than 2.5 million revenue-generating units (RGUs) across cable TV and broadband, or smaller independent system operators working within a geographical cluster.

In recent years, a number of smaller networks have already been acquired by Korea’s biggest cable TV & broadband company, CJ HelloVision.

From a content and services standpoint meanwhile, SKT could also bring together mobile content and apps properties such as Hoppin and T Store with IPTV services from SK Broadband, creating scope for new distribution deals while helping scale content costs more effectively.

Execution and implementation will take time however, should this option be pursued at all.

Significantly, SKT has indicated that this deal is not a merger, with SKB continuing to operate as a subsidiary for the foreseeable future.

Organic growth drivers

SKT acquired a majority stake in SK Broadband  then called Hanaro Telecom – back in 2008, and presently owns 50.6% of the company.

SKB currently offers triple-play bundles of fixed-line phone, broadband and IPTV.

The company ended 2014 with 4.8 million broadband subs (25% market share) and 2.8 million IPTV customers (27% market share), making it Korea’s second-largest provider of both broadband and IPTV after KT.

SKB has amassed a 10% share of Korea’s overall pay-TV market, which comprises more than 27 million subscriptions (including multiple subs within a household) according to industry analysts Media Partners Asia.

SKT, meanwhile, has over 50% of Korea’s mobile market, ahead of second-placed KT and third-placed LG Uplus.

In recent years, SKB has emerged as Korea’s fastest growing telecoms player across broadband and IPTV, increasingly benefiting from bundled sales.

The company’s bundled sales ratio grew from 46% in 2013 to 58% in 2014, still below the 65-70% norm enjoyed by slower growing juggernauts such as KT. More than 20% of SKB’s broadband services remain single-product users.

SKB generated 548 billion won (US$519 million) in Ebitda in FYE Dec. 2014, on sales of ~2.7 trillion won.

Broadband contributed more than 32% to the top line, despite pressure on Arpu. SKB continues to grow incremental broadband share.

At the same time, IPTV subscriber growth has been robust, outpacing the market. Arpus have been resilient to price competition due to the positive impact of VOD revenues, which expanded by 33% in 2014.

Deal details

SKT will use treasury shares to complete the SKB acquisition, with the transaction price set at 4,822 won per share, about 10% below Friday’s (i.e. March 20) closing price.

A shareholder approval meeting will be held May 6, with the transaction expected to complete by June 9. If all goes smoothly, SKB should delist June 30.

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