SK Engineering & Construction (SK E&C) is trying to sell its wholly-owned subsidiary SK TNS, with the company likely to be valued at approximately 400 billion won ($367 million).

SK Group is in talks with the private equity firm to sell a 100% stake in its information communications construction company, sources said on Wednesday (December 9). 

Market insiders are closely watching the valuation of SK TNS, as this is quite a bit higher than the price recorded when its shares were sold to EUM Private Equity (EUM PE) in 2015.

EUM PE invested in SK TNS with KDB Capital through their newly created private equity fund, purchasing 160,000 redeemable convertible preference shares (RCPS) issued by SK TNS at 1 million won per shares, which made the equity value about 320 billion won. SK TNS had no borrowings, with cash and cash equivalents worth about 10 billion won. Based on the calculation, the enterprise value (EV) of SK TNS stood at 310 billion won.

SK TNS’ peer companies could be used as a reference in estimating the valuation of the firm. These include GS Group’s subsidiaries GS Neotek, GS Engineering & Construction and Xi S&D, KEPCO KDN, DaeBo Communication & Systems, S-1 and KRTnet.

The EV to earnings before interest, tax, depreciation and amortization (EBITDA) multiple of these companies vary depending on their mainstay business. KRTnet has an EV/EBITDA multiple of 11.3 times and Xi S&D a multiple of 13.8 times. GS Engineering & Construction, which mainly focuses on the construction business, and S-1, which focuses on security services, have EV/EBITDA multiples of 4.6 times and 8.5 times, respectively.

SK TNS’ EBITDA was about 40 billion won in the 2019-20 fiscal year, which ended in June. The firm’s EV stands at 330 billion won, based on its peers’ EV/EBITDA multiple of 11 times.

A valuation for SK TNS also could be based on its price earnings ratio (PER). Based on the PER of peer companies, which is about 15 times, SK TNS’ EV is approximately 350 billion won, or 90 billion won less than its valuation based on EV/EBITDA. SK TNS recorded net income of 28 billion won this year and has a net cash position of 69.5 billion won.

“The key to this deal is likely to be which companies will be its peers, because there is quite a large gap in multiples among information communications companies,” said a source. (Reporting by Byung-yoon Kim)