SK Telecom’s China Bet

Moon Ihlwan

South Korean mobile carrier SK Telecom’s agreement to invest $1 billion in China Unicom for a foothold in the world’s biggest mobile market is not a welcome move for many shareholders. Since the news first broke on June 20, SK’s stock has fallen 6.1% to $208.5, with some securities analysts voicing doubts over benefits SK’s shareholders might get from the investment. Merrill Lynch and Nomura cut their share price targets on the Korean company by 9% and 4.5% respectively, saying investors would have preferred SK focus on the home market and return excess cash to shareholders.
In the short-term, shareholders are not likely to get much from SK’s $1 billion purchase of bonds convertible into a 6.7% stake in China’s No.2 mobile phone company. But the investment makes sense, given SK Chief Executive Kim Shin Bae’s strategy of venturing into new businesses to keep growing. SK’s expansion becomes increasingly difficult at home where four out of every five Koreans have a mobile phone. And China certainly has huge potential for growth.
Sure, there are uncertainties ahead. China hasn’t said when it will grant 3G licenses or how many it will issue. To what extent, SK could influence Unicom’s management is a big question mark. But with Unicom burdened with two conflicting networks, SK’s expertise in CDMA (code division multiple access) makes the Korean company an attractive suitor. Also, SK has an option not to convert bonds into equity and seek redemption after three years if things don’t look promising. As long as SK wants to expand its reach overseas, the investment in convertible bonds may be a worthwhile bet with big upside potential with limited downside risks.