I've been doing a bit of digging on these Korean HoldCo situations. I think one big variable that is missing from the analysis is tax. The tax rate on cap gains is ~26% apparently. With SK Square, they purchased their stake in SK Hynix back in 2012 I think. So that has a huge unrealized loss that would lead to a sizable tax bill if they ever sold and monetized their investment.
Even if you don't think they will sell the stake imminently, I still think it makes sense to include some deduction for the associated tax liability. I just don't think investors are going to ignore the tax, so they will never bid this to 0% discount when they can just buy SK Hynix on the open market with no associated tax liability.
Correct, we talk about this elsewhere (SK Square, but also SoftBank|arm, EchoStar|SpaceX etc.) as this applies to HoldCos in general (and part of the reason why there should always be some level of structural discount in addition to liquidity / other potential overhangs.) Korea is unique in that the direct holdcos cannot sell for regulatory purposes (there are workarounds if they really wish to) and SK Square has to maintain a minimum 20% holding in Sk Hynix (which does not negate the theoretical CGT)
SK Square seems unique in how significant the tax is. The stake is close to 100% unrealized gain because it's up so much. So that should drive a 25% discount even if there's no other considerations going into a HoldCo discount.
The SATS/SPCX setup has a much more modest gain, and thus a lower deserved discount as a result of tax. Plus Ergen is a pretty creative financial engineer, so might be able to find a way to minimize that total tax.
I've been doing a bit of digging on these Korean HoldCo situations. I think one big variable that is missing from the analysis is tax. The tax rate on cap gains is ~26% apparently. With SK Square, they purchased their stake in SK Hynix back in 2012 I think. So that has a huge unrealized loss that would lead to a sizable tax bill if they ever sold and monetized their investment.
Even if you don't think they will sell the stake imminently, I still think it makes sense to include some deduction for the associated tax liability. I just don't think investors are going to ignore the tax, so they will never bid this to 0% discount when they can just buy SK Hynix on the open market with no associated tax liability.
Correct, we talk about this elsewhere (SK Square, but also SoftBank|arm, EchoStar|SpaceX etc.) as this applies to HoldCos in general (and part of the reason why there should always be some level of structural discount in addition to liquidity / other potential overhangs.) Korea is unique in that the direct holdcos cannot sell for regulatory purposes (there are workarounds if they really wish to) and SK Square has to maintain a minimum 20% holding in Sk Hynix (which does not negate the theoretical CGT)
That's fair.
SK Square seems unique in how significant the tax is. The stake is close to 100% unrealized gain because it's up so much. So that should drive a 25% discount even if there's no other considerations going into a HoldCo discount.
The SATS/SPCX setup has a much more modest gain, and thus a lower deserved discount as a result of tax. Plus Ergen is a pretty creative financial engineer, so might be able to find a way to minimize that total tax.