SEOUL, June 16 (UPI) -- South Korea's third-largest conglomerate, the SK Group, has barely escaped from the danger of its break-up, as the flagship SK Corporation has approved a $714 million plan to bail out its ailing sister firm, SK Global Co.
Many analysts and local businesses welcomed the rescue plan as paving the way for a lifeline from creditors, which will keep the troubled conglomerate afloat. SK Corporation, the country's top oil refiner, is the main shareholder in SK Global, the insolvent trading unit of the group.
Without the bailout, SK Global would have been liquidated, which could lead to the break-up of the conglomerate and cause financial turmoil in the world's 13th biggest economy, they say.
But reform-minded economists and civic groups warn the plan to rescue the troubled company would pose another burden on the country's economy, which is tainted by a series of fraud scandals.
"With its bailout plan, SK Corporation failed to break ties with ailing SK Global, whose financial problems would spill over to other units, causing a total crisis of the conglomerate," said Kim Sang-jo, a professor at Hansung University in Seoul.
South Korea's family-run conglomerates, called chaebol, have been accused of using profitable units to bail out weaker affiliates despite oppositions by minority shareholders, which critics say caused the country's economic crisis in 1997-98.
The fate of SK Global has been widely considered as a test of reformist President Roh Moo-hyun's efforts to overhaul corruption-tainted chaebol and protect shareholder rights.
"The bailout plan is another setback to corporate reform campaigns," Kim told United Press International. The SK Group should have learned a lesson from the collapse of Daewoo Group, he said.
Daewoo, the country's once second-largest business empire, was dismantled under $80 billion of debt in the world's biggest bankruptcy amid the 1997-98 Asian financial crisis.
"The bailout for SK Global would hurt transparency in management in the group and efforts to remove illegal cross-debt guarantees and insider-trading among group affiliates," Kim said.
SK Corporation's minority shareholders, foreign investors and unionized workers, who are calling for reforms of the practices of chaebol, vowed to take legal action against the bailout plan.
SK Corporation shares closed down 3.4 percent after falling as much as 11 percent on Monday, while SK Global jumped by its daily limit high of 15 percent. Another affiliate, SK Telecom, the country's top mobile operator, lost 2.3 percent, because investors were worried that financial problems at SK Global may spill over to other units.
SK Global, saddled with 6.7 trillion won ($5.6 billion) in debt against total assets of 6 trillion won ($5 billion), has been on the brink of liquidation since a $1.2 billion accounting fraud was unearthed in March.
The company has been placed under bank receivership, with its debt repayments frozen for three months. At the end of 2002, SK Global had a negative balance sheet of 4.4 trillion won ($3.7 billion).
But the ailing company would be rescued after SK Corporation's board approved an 850 billion won ($714 million) bailout plan for SK Global after an 11-hour-long marathon meeting on Sunday night.
"The decision was made after careful consideration as to whether or not liquidating SK Global would be beneficial to creditors and the company," SK Corporation's chief spokesman Lee Man-woo told UPI. "From a commercial point of view, the board judged the debt-to-equity swap would be beneficial for both," he said.
"SK Corporation will hold a session for shareholders on the decision soon after main creditors' meeting," Lee said. SK Global creditors, who have threatened to liquidate the company unless SK Corporation joined in the rescue, are due to meet on Tuesday afternoon to vote on the bailout package.
If the creditors agree on the debt-to-equity conversion ratio, SK Global would be able to swap up to 2.85 trillion won ($2.39 billion), or 43 percent of its debt for equity.
The swap includes 850 billion won ($714 million) of common shares, one trillion won ($840 million) of redeemable preferred shares, and one trillion won of convertible bonds. The creditors are also expected to freeze all of SK Global's debts through 2007.
But the fate of SK Global still remains uncertain because the rescue plan is facing fierce protests from SK Corporation's foreign shareholders and unionized workers, who fear that the bailout plan may saddle SK Corporation with bad debt and result in a financial drag on the company, which could threaten jobs.
"We'll seek all necessary legal actions to nullify the board decision to give aid to SK Global." the union said in a statement. Union leaders staged a sit-in protest against the aid plan on Sunday outside SK Corporation's main office, where the board members were discussing the plan.
Foreign investors, led by Monaco-based Sovereign Asset Management, are also strongly opposing SK Corporation's involvement in a rescue of SK Global. Sovereign, the largest shareholder in SK Corporation with a 14.9 percent stake, has called for the separation of profitable SK Corporation and the troubled conglomerate.
"Sovereign has already expressed its strong opposition to any plans by SK Corporation to support SK Global in any way that is not based solely on commercially sound principles," it said in a recent statement.
"Sovereign questions the legitimacy of the SK Group to call on SK Corporation to participate in their normalization plan under any circumstances," it said, vowing to take "any actions necessary" to forestall the rescue deal.
The bailout plan came two days after SK Group owner was sentenced to three years in prison for illegal stock trading and other charges linked to accounting fraud.
Chey Tae-won, SK group's controlling shareholder, has been in prison since February following revelations of illegal stock transactions. Nine other senior SK Group executives have been indicted for falsifying accounts to inflate earnings at SK Global.
Chey, the eldest son of the SK group's founder and son-in-law of ex-president Roh Tae-woo, has been blamed for using illicit practices to tighten his control of the conglomerate, which holds 58 subsidiaries, including the country's top mobile phone carrier SK Telecom.
"Big conglomerates have served an engine for South Korea's rapid economic development," said Yon Kang-heum, a professor at Yonsei University. "But now, they are urged to improve transparency in management to meet global standards," he said.
