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| The construction site of SK Innovation's battery plant in Georgia. Courtesy of SK Innovation |
By Nam Hyun-woo
As SK Innovation is considering plans to spin off its battery business, the company now has to tackle various complex scenarios to determine its options. Industry officials are speculating on the speed at which it would be able to reach a break-even point and how the outcome of its legal battle with LG Chem will affect its spinoff strategy.
SK Innovation has been expected for years to separate its battery business, and the company first revealed its intention to do so during the InterBattery 2020 exhibition held last month. At that time, SK Innovation's battery business chief Ji Dong-seop said the company is "contemplating spinning off its battery business," though SK Innovation is yet to fix a certain timeframe.
Though Ji's remark is not a fixed determination that SK Innovation will create a battery spinoff, industry officials said they are accepting it as a natural consequence, because SK Innovation is in a dire need of massive resources to finance its aggressive expansion. The company is now simultaneously building battery plants in China, the U.S. and Europe, and its battery production capacity will grow to 41 gigawatt-hours next year, up 8.7 times from that of last year.
S&P Global Ratings on Tuesday downgraded SK Innovation's ratings to BBB- from BBB. The rating house cited the inventory-related losses of the company's refining businesses and the heavy investments for electric vehicle (EV) battery business which would result in much higher debt for the company.
"We believe SK Innovation's aggressive investments will continue in 2020 and 2021," S&P Global Ratings analyst Kim Min-jib said. "The company is going through a peak in its investment cycle in 2019-2021, with an annual average capital expenditure of 3 trillion won to 4.5 trillion won to strengthen its scale and competitiveness in EV batteries and to upgrade its oil refining facilities."
Kim added that "the company is exploring deleveraging measures such as asset sales and partial sales of stakes in its subsidiaries" to "minimize the deterioration in financial metrics."
If SK Innovation's battery business is spun off, the company will likely explore ways to use the new firm as a cash source by selling stakes to draw new investors or listing it on the bourse.
SK Innovation has already tested this process with its subsidiary SK IE Technologies (IET), which makes lithium-ion battery separators. SK IET was spun off from SK Innovation in April last year and secured about 300 billion won by selling a 10 percent stake to a domestic private equity fund before its bid to offer its shares to the public next year.
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| Researchers at SK Innovation's plant in South Chungcheong Province hold lithium-ion battery cells in this undated promotional photo. Courtesy of SK Innovation |
Industry officials said SK Innovation will likely time its spinoff for after its battery business reaches a break-even point, citing its rival battery maker LG Chem's case.
In September, LG Chem announced its bid to spin off its battery business in December, as the company was convinced that its battery business would reach the break-even point in the fourth quarter of this year. Passing the break-even point means the business can stay afloat as a separate company, thus the timing of when the company reaches that point will be key in anticipating SK Innovation's battery spinoff schedule, industry officials said.
During its conference call for the third quarter, SK Innovation said it will log more than 5 trillion won in battery sales and reach its break-even point in 2022.
Casting uncertainties in SK Innovation's projected spinoff is the ongoing legal dispute with LG Chem in the U.S. over trade secrets. The U.S. International Trade Commission (USITC) will hand down its final determination as early as Dec. 10 on LG Chem's accusation that SK Innovation stole trade secrets, and the result may prohibit SK Innovation from doing businesses in the U.S. As the USITC has already gave an initial determination favoring LG Chem, the two sides are in negotiations to contain the impact of the result.
"Since a reconciliation may cost SK Innovation a huge amount of compensation, financial pressure is growing for the company," an industry official said. "This may spur SK Innovation to hurry its battery spinoff."
