The high dependency of SK TNS on affiliates of SK Group is likely to be the key factor in a successful sale of the SK Engineering & Construction unit, with market insiders paying particular attention to the company’s fundraising from a financial investor in 2015.

SK Group is in negotiations with a private equity (PE) firm to sell SK TNS, industry sources said on Wednesday (December 9). The company, which constructs and maintains wire and wireless networks for SK Group, will undergo its second ownership shakeup in five years if the deal is struck, as SK TNS was spun off from SK E&C into a separate entity in 2015.

Industry insiders are focusing on the company’s previous fundraising in 2015, when SK Group secured money from EUM Private Equity by issuing 160,000 redeemable convertible preference shares (RCPS) of SK TNS. The deal was structured for SK E&C to own the entire 160,000 common shares of SK TNS and the financial investor to hold 160,000 of RCPS.

Views on SK TNS were mixed when the deal was underway, an industry source said. A number of PE firms were interested in acquiring a stake in SK TNS, but the response was tepid, with about three companies reportedly joining the race before EUM PE struck a deal with the highest offer. EUM PE bought 160,000 RCPS for 160 billion won ($147 million).

“Market insiders widely thought SK TNS’ strength is also its weakness and its upside potential will be limited as it is highly dependent on the group’s affiliates,” one source said.

SK TNS generated 98.1% of its revenue from affiliates under SK Group in 2015, especially SK Telecom and SK Broadband. The business structure was reflected in its transaction with EUM PE, as the conversion right of the RCPS was owned by the PE firm but the redemption right went to SK TNS.

“EUM PE apparently focused on the fact that the deal was with an affiliate of a South Korean conglomerate and it could generate stable returns through the redemption right,” said an industry source.

SK TNS redeemed RCPS every year and closed the transaction with EUM PE in September. The PE firm reportedly earned 7–8% of returns per year by accepting the redemption right. (Reporting by Byung-yoon Kim)