SK Telecom to buy business off affiliate for $714 million

SK Telecom will purchase the leased-line business of its affiliate SK Networks for W892.9 billion ($714 million). The Korean telecom operator will also assume SK Networks' debt totalling W627.8 billion.

The assets the company is buying are worth W654.1 billion and comprise SK Networks' mobile telecommunication transmission network -- including switchboards, base stations and repeaters -- which will translate into greater network capacity for its mobile phone service. The deal will increase the length of SK Telecom's optical cable from just under 5,000km to 88,000km and will make its mobile network 92% self-sufficient with regards to optical cabling, up from 51% before the transaction. As a result, the company will no longer need to pay W300 billion annually to use SK Network's leased lines, which it has done since 2002.

"Concerns were constantly raised that SK Telecom was too dependent on outside network resources," Dong-Hyun Jang, SK Telecom's chief financial officer, said in an announcement issued Friday. "However with this agreement, SK Telecom will be able to greatly enhance efficiency in network operation and costs."

The deal is subject to a two-month approval process and payment is expected to occur in September.

According to Dealogic, which adds the debt to the asset value when calculating the size of the transaction, this is the fourth largest M&A deal in Korea so far this year. Although M&A activity in the country is down 15% year-to-date, there has been a record number of big deals, with five announced transactions larger than $1 billion. The largest deal year-to-date is the $1.8 billion acquisition of Korea's Oriental Breweries by private equity firm Kohlberg Kravis Roberts and Co (KKR) earlier in May.

In the same announcement, SK Telecom also said that it will take part in SK Broadband's capital-raising exercise. On Thursday last week, the Korean internet company said that it would commence a rights issue consisting of 60 million shares, or approximately 25% of the current share capital. SK Telecom, which owns 43.4% of SK Broadband, said it would subscribe to as much as W300 billion ($241 million) of stock. The final price will be decided around July 10.

The announcement of SK Telecom's participation in the rights issue did little to stop a decline in SK Broadband's stock, which fell by 3.8% on Thursday and a further 5.9% on Friday.