Korea's LG Telecom merges with two affiliates

LG Telecom, the smallest of Korea's three mobile phone operators, said yesterday that it will merge with its two affiliates, LG Dacom and LG Powercom. The three companies have separate listings on the Korean stock exchange, but are all part of Korean conglomerate the LG Group.

The proposed merger is designed to help the new LG Telecom "better navigate through the industry's competitive dynamics in the wake of recent consolidation moves by competitors, and where technological convergence creates additional business opportunities", said LG Telecom in a press statement. All three boards of directors have approved the deal.

LG Telecom's move follows that of KT Corporation, Korea's biggest telecom carrier by revenue, which absorbed its wireless unit, KT Freetel, in June. Market analysts expect that SK Telecom, the country's number two mobile operator, which bought its leased-line affiliate SK Networks in May, will do the same with broadband services provider Hanaro Telecom (renamed SK Broadband), next year.

The new firm, which will simply be called LG Telecom, will have combined assets of W7.9 trillion ($6.8 billion), while generating annual revenues of W 7.7 trillion and an annual operating profit of W700 billion, based on the three companies' last reported yearly results. On an aggregate calculation it would have 13.6 million subscribers, although on a pro forma basis that number would likely be a little lower due to shared customers.

Morgan Stanley is the sole adviser for the merger, which "will create a stronger, more efficient provider of a variety of telecommunication services, including wireless, wireline, broadband, VoIP and IPTV services," according to the statement. So, an ability to cross-sell products should militate against any cannibalistic customer overlap.

Operators in South Korea have been looking for an edge in one of the world's toughest telecom markets by developing so-called converged products and by bundling mobile, fixed-line and internet services.

The idea is that the combined enterprise will provide an integrated platform with "enhanced scale and a diversified business portfolio" through which to gain competitive advantages in the marketplace. The diversification comes from LG Telecom's mobile business, which has an 18% share of the domestic market; LG Dacom's fixed-line franchise among corporate customers; and LG Powercom's provision of broadband services.

Economies of scale should be attained by sharing marketing, network and administrative operations and also from marketing activities. The latter is expected to account for about half of the total cost reductions due to lower sales commissions and advertising spending. Korea's stringent labour laws mean there will be few cost savings from reduced manpower.

The deal is subject to approval from shareholders, who will be canvassed at an extraordinary general meeting on November 27. A one-third quorum is needed and two-thirds of it must vote in favour of the deal.

It will also need the nod from the Korea Communications Commission, which should happen before the planned merger effective date of January 1, 2010, and should meet no objections since the commission gave the go-ahead for the KT and SK Telecom deals.

As of yesterday, LG Telecom, LG Dacom and LG Powercom had market capitalisations of $2.2 billion, $1.4 billion and $800 million, respectively.

Adhering to the rules of Korea's recently implemented Financial Investment Services and Capital Markets Act, LG Telecom will issue new shares to the shareholders of LG Dacom and LG Powercom, and will remain as the surviving entity.

Shareholders of LG Dacom will receive 2.149 LG Telecom shares for each LG Dacom share, and the LG Powercom shareholders will receive 0.742 LG Telecom shares for each of their LG Powercom shares. LG Dacom's 40.87% stake in LG Powercom will be cancelled when the merger is finalised, and LG Dacom will not be entitled to receive new LG Telecom shares in respect of its shareholding in LG Powercom.

Dissenting shareholders can exercise their appraisal rights from November 28 to December 17. However, there are likely to be few, if any, significant objections.

LG Group owns 37% of LG Telecom and 30% of LG Dacom directly, as well as 41% of LG Powercom indirectly through LG Dacom. Korea Electric Power, the government-owned electricity generating company, has a 38.8% holding in LG Powercom and has already confirmed its approval of the deal.

Sang-cheol Lee, who is a former Korea minister of information and communication and also president of Kwangwoon, will become chief executive officer of the merged entity, subject to approval by the new board of directors.