South Korean conglomerate SK Holdings took a bold step to bolster its chip-making capabilities this week, announcing a W620 billion ($530 million) all-cash offer for a majority stake in silicon wafer manufacturer LG Siltron.
SK will take control of one of the most sought-after companies in the semiconductor industry after buying LG Corporation’s entire 51% stake in LG Siltron. The remaining 49% stake is split between local private equity funds Vogo Investment and KTB Private Equity.
LG Siltron has attracted plenty of interest from potential buyers in recent years amid a spate of consolidation among global wafer makers. This consolidation has been driven by a massive oversupply over the last few years that has caused prices to drop and manufacturers' profits to fall.
As South Korea’s only silicon wafer manufacturer of scale, LG Siltron has long been one of the targets of bigger players alongside its US rival SunEdison Semiconductor and Germany’s Siltronic. Missouri-based SunEdison Semiconductor was acquired by Taiwan’s Globalwafers last year, while Munich-headquartered Siltronic is one of the main targets of China’s National Silicon Industry Group.
Korean state-backed lender Woori Bank and Japan’s Orix Group were close to acquiring Vogo Investment’s 29% stake in LG Siltron early last year, according to local reports.
To say SK is taking a bold step in buying LG Siltron is no exaggeration — the wafer maker has not been profitable since 2011. In the 2015 financial year, LG Siltron booked a net loss of W66 billion, nearly triple its W23 billion loss a year earlier.
But SK is buying at a time when the industry shows signs of recovery. This is the result of a number of factors, not least rising demand from Chinese technology companies and the stronger Japanese yen, which has reduced the competitiveness of large Japanese chip makers such as Shin-Etsu Chemical and Sumco Corporation.
“Demand from Chinese smartphone brands has indirectly caused the price hikes for wafers and chips in the channel markets,” said Sean Yang, research director of DRAMeXchange, a market research firm.
SK’s acquisition of LG Siltron aligns with the group’s plan to invest heavily in future technologies. Chief technology officer Lee Ho-soo said last year the group plans to achieve $2.1 billion of revenue through 2020 by developing new businesses based on artificial intelligence, big data and cloud computing technologies.
As part of its long-term development plan, SK will invest $9 billion in the next three years to build information and communications technology systems through SK Telecom, the group’s network operating unit.
SK has been moving forward with the plan since the controversial $25 billion merger of SK Holdings and SK C&C in November 2015 — a move that allowed the founding Chey family to retain control of a vast empire that has businesses spanning energy, construction, shipping, chemical and information technology.
The group made its first technology acquisition last in February, buying a 49% stake in Taiwanese special gas supplier OCI Materials, now known as SK Materials, for $415 million. OCI Materials supplies nitrogen trifluoride, a chemical used in the chip-making and fabrication process.
In a similar vein to the OCI Materials acquisition, the purchase of LG Siltron is aimed at creating vertical integration, allowing SK to secure a stable supply of silicon wafers for its production of integrated circuits and dynamic random access memory chips.
LG Siltron is one of the biggest wafer suppliers to SK Hynix, the group’s semiconductor manufacturing unit.
SK said the acquisition is subject to regulatory approvals and is expected to close by the end of the year.
Credit Suisse advised LG Corporation on the stake sale.