Yonhap News reported last night that the Fair Trade Commission, in its M&A assessment report, had rejected SKT’s bid to acquire CJ Hellovision, saying it would hinder competition.
The FTC pointed out that the combined entity would control more than 60% of the market in 21 of the total of 23 broadcast areas in which CJ operates, thus hurting competition. The two companies have yet to issue an official comment.
Decision difficult to understand The decision, if true, is hard to understand for a number of reasons. First, the FTC’s decision was based on regional, not national market share. The Korean cable TV market is divided into 78 regions and most have a monopoly player. The dominance of such players is usually more intense outside of Seoul and Gyeonggi-do.
The combined national market share of cable TV providers in Korea is about 50%, but in specific areas the figure could be higher. If the FTC consistently applied the rationale used for its rejection of the SKT-CJ Hellovision merger, it would be very difficult for any telecom service provider to acquire a cable TV provider. This would mean cable TV providers would have no other choice but to merge with other fellow cable TV players or seek private equity investment to better fund their operations.
However, in reality, no cable TV provider is financially capable of acquiring another cable TV company in Korea, and luring PEFs would not be easy given losses they have suffered on their cable TV investments in Korea. All this will likely make the structural overhaul of the Korean pay TV market including cable TV difficult.
Second, if the FTC plans to take issue with regional market share, its supervision will have to be focused on regional monopolies and not national ones. This goes directly against the relevant laws and regulations, which focus on regulating national monopolies.
Next steps Since SKT and CJ Hellovision have yet to comment on the news report, the facts have not been verified. However, even if the report is true, the FTC assessment report is not the last word. On Jul 20, all FTC’s committee members will meet to make a final decision. Until then, the FTC’s stance may change depending on public sentiment and efforts by the two companies to win it over.
A month-long review by the Ministry of Science, ICT and Future Planning and the Korea Communications Commission will follow the FTC’s final decision, but they will not be able to overturn the FTC’s decision, since the FTC is in direct charge of these matters.
Investment strategy After the news was released on Jul 5, both SKT and CJ Hellovision shares fell. CJ Hellovision shares lost more than 10%, reflecting investor disappointment.
However, we do not believe shares will fall further, as a final decision has not been made and risks are already priced in (market cap W820.0bn) considering annual sales of W1.18tn, operating profit of W105.0bn, and net profit of W59.7bn.
Moreover, CJ Hellovision’s share price, under W11,000, is the level seen before SKT’s decision to acquire CJ Hellovision was announced. Given that KT Skylife’s market cap is over W800.0bn, although its sales are only about half (W626.4bn) of CJ Hellovision’s, CJ Hellvision shares are unlikely to fall further.
However, if the merger is rejected finally, we will revise down our target price (current TP reflects synergies from the merger). If the merger is rejected, SKT shares may not be affected much, as dividends are still attractive and the M&A issue has not boosted shares.
Concerns over KT may ease, as Internet backbone fee is likely to decline and broadband competition would be unlikely to intensify. Investors need to pay attention to the plenary meeting of the FTC on Jul 20.
Source: Yuanta Securities
