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22 June 2021

SK Telecom takes trend for telco business separation to a new extreme

There is a rising trend for operators to separate themselves into two or more standalone companies in order to unlock value in certain assets, or to achieve greater agility to go after new opportunities in services. The most common example in the past year has been for operators, especially in Europe, to spin off their mobile towers activities.

But now there is also a revival of a pattern that was popular in the early 2010s – to separate digital services from networks and conventional services in order to drive the growth of new revenue models. In the past, some of these efforts have resulted in very limited gains, often because the digital services proposition was too weak – Veon, Telstra, T-Mobile and others all launched and then pulled back on separate digital businesses.

But now, some telcos hope new enablers like 5G and AI/ML will improve their chances and some, such as Veon, are even coming back for a second try. But the most dramatic plan has been unveiled by SK Telecom of South Korea – already one of the most successful operators at building a fairly autonomous digital business, it has now set itself the challenge of being “the next Softbank” (hopefully without the disasters that befell many of the diverse investments the Japanese operator made from its huge Vision Fund, which included stakes in Uber and WeWork).

SK Telecom has a $5bn budget to make acquisitions to bolster its digital business, but also aims to leverage fellow members of SK Group, the huge conglomerate or chaebol to which it belongs, which numbers about 95 companies.

It plans to split itself into a telco business and an investment business called SKT Investment. Of the $5bn, about $2bn will come from IPOs of five SK Telecom subsidiaries on the Korea stock exchange in Busan. These five will be:

  • One Store, a mobile app store backed by Microsoft and expected to fetch a $1.3bn valuation, which should IPO later this year
  • ADT Caps, a security firm, to IPO in summer 2022
  • Content Wavve, a streaming service, and 11 Street, a mobile commerce business, will aim for IPO by 2024
  • T-Map Mobility, a mobile platform which has a joint venture with Uber, could aim for a dual listing in Busan and New York.

SK Telecom also holds stakes in other members of the chaebol, including 21% in the SK Hynix memory chip business, which will now be part of SKT Investment. Hynix, Korea’s second largest chip provider after Samsung, is in the process of seeking regulatory approval to acquire Intel’s storage division for $9bn.

As well as the Hynix stake and the five businesses scheduled for IPO, SK Investment will house further SK Telecom digital subsidiaries and ventures including Dreamus, SK Planet, FSK L&S, Incross, NanoEnTek, Sparkplus, SK Telecom CS T1 (an e-sports joint venture with Comcast Spectacor), SK Telecom TMT Investment (which invests in US markets), ID Quantique (a Swiss-based encryption company) and Techmaker (a joint venture with Deutsche Telekom).

The “horizontal spin-off” of the new arm will take place on November 1 and the two separate units will then relist on November 29. SK Telecom’s path “may be the same” as that of Softbank, said EVP Huh Seok-joon. Softbank established a huge investment fund with the aim of becoming a platform business, with stakes in technologies that would be foundational for future digital services, such as advanced semiconductors (Softbank now owns ARM, though is trying to sell it to Nvidia), as well as AI, cloud technologies, 5G and others.

Huh Seok-Joon explained why he thought SK Telecom was better positioned than Softbank. “Softbank is selling its semi business,” he said. “They didn’t succeed in semiconductor, but they succeeded in investing in the platform business especially on the mobility side. If you look at us, we are successful in semiconductor and we are successfully entering the platform business.”

He added: “There is a global shortage of semiconductors, so I think there’s a very large opportunity for us. We will definitely make more acquisitions and push for both organic and inorganic growth to become a world leader in the semiconductor business.”

Meanwhile, the growth strategy for the new-look SK Telecom will focus on being “an AI and digital infrastructure company that sustains stable and solid growth”, with expansion in fixed and wireless access and in home media, leveraging 5G.

Other telco separations are less radical, but still have some of the same aims – to increase agility, and to generate more value. Denmark’s TDC recently announced that it was separating its network assets from its customer-facing services business, in order to unlock value in the former, at a time when infrastructure stocks are highly valued, while increasing flexibility in the latter. Other operators have taken the same route such as CETIN in the Czech Republic.

TDC was acquired by infrastructure investor Macquarie and three local pension funds in 2018. Its two new businesses, called TDC NET and Nuuday, were originally set up in June 2019 but the separation will only be finalized on January 1 2022, with the aim of “establishing two market leaders within their individual sectors”.

TDC NET is Denmark’s largest mobile network and broadband provider while Nuuday is its largest connectivity, communication and entertainment service provider, with nine digital brands.

Veon, having pulled back from many digital activities a few years ago, is expected to ask its shareholders to approve a plan to separate its services division. The plan would see co-CEO Sergi Herrero joining the Veon board once he steps down from his current role at the end of June.

The aim is to turn Veon into a holding company for several business units. Initially these will be the telecoms and digital companies plus a separate ventures arm to invest in non-Veon services and partners. But the operator, whose biggest market is Russia, hopes that some of the digital activities could become separate businesses, which could even be IPO’d in future. These might include financial services, entertainment and big data services.

Herrero told Capacity that the new digital unit will focus on assets that have been developed internally within operating companies including those in Bangladesh, Pakistan, Russia and Ukraine, and then adapt them for the company’s other markets and even for non-Veon countries. “But we will also get a budget for acquiring companies,” he added.

Veon’s Kazakhstan opco, Beeline, recently launched the country’s first digital payment card integrated with a mobile financial services service. “Mobile financial services are a key strategy for the future growth of Veon and one that is highly suited to the markets we serve where financial inclusion remains low,” said co-CEO Kaan Terzioğlu.

“We have successfully grown financial services and e-commerce businesses off the back of mobile operations in Pakistan, and we are now announcing a similar initiative by Beeline in Kazakhstan.” Veon already runs JazzCash in its Pakistan unit and has 14m users there.

Mobile money services are often a key focus of operators’ efforts to diversify their revenue streams, as seen in companies as diverse as Orange Bank and Kenya’s Safaricom.

While some companies are looking for growth in services, others are becoming even more focused on infrastructure. Colony Capital, which has been building a broad portfolio of tower and other infrastructure subsidiaries via acquisition, plans to divest $2.7bn worth of non-digital investments, so that it can focus on infrastructure. The $2.7bn of assets under management will be transferred to New York-based Fortress Investment, for a payment of $535m. They include land, offices and hotels in France, Spain, the UK, Ireland and the USA.

“This transaction is a watershed moment for us, a big step towards our finish-the-mission goal as we rotate to a fully digital business,” said CEO Marc Ganzi. “Not only are we freeing up over a half-billion dollars to redeploy into digital, we’re simplifying our business, making it easier to manage and to understand.”

After the deal is complete, probably in the fourth quarter, 80% of Colony’s assets will be digital and the firm will rename itself DigitalBridge from this week. Its holdings include in-building wireless neutral host Freshwave, towerco Highline do Brasil, and Vantage Data Centers, as well as half of US wholesale fiber provider Zayo. Digital Bridge was the name of a company led by Ganzi, which merged with Colony Capital in 2019.

DigitalBridge said: “The new name reflects the significant business transformation the company has undergone since the leadership and board of directors made the bold decision to chart a new direction, realigning a diversified real estate investment firm to focus exclusively on the fast-growing digital infrastructure sector.”

Ganzi said the renamed company will “build, operate, and finance a new era in connectivity, leveraging a single platform focused on the full spectrum of digital infrastructure including towers, data centres, fiber, and small cells”.