Korea’s SK Telecom (SKT) is shaping up its SK Broadband business as a digital video behemoth, through a complicated merger process with Korea’s largest cable MSO, CJ HelloVision.

SKT will own 75% of the new SK Broadband, which will have more than 7 million pay-TV customers and close to 6 million broadband subscribers, with 3.5 million VOIP users and an MVNO base edging towards 1 million subs.

The deal gives SK Broadband a 26% share of pay-TV and 30% of fixed broadband in Korea’s over-penetrated and hyper-competitive video and broadband industries.

The new SK Broadband has a turnover of about W4 trillion (US$3.6 billion) this year, with W1 trillion in Ebitda.

SK management outlined a few synergies on a conference call yesterday, including benefits from a larger telco media bundle, up-selling across CJ HelloVision’s customer base, higher home shopping commissions and MVNO leasing.

Costs could scale from network sharing and a higher customer base spread across channel and VOD content expense.

There are concerns, however, that more than 35% of CJ HelloVision’s ~4 million pay-TV base remain on a low-Arpu legacy analog platform, which is churning over to IPTV and could be a drag on near-time execution.

Benefits of an oversized bundle may be overstated, but there are up-selling opportunities across CJ HelloVision’s customer base.

However, similar opportunities have yet to materialize to great effect in Japan after telco KDDI bought into cable MSO J:Com.

The deal also brings SKT and SK Broadband into full frontal combat with KT, which may lead to more price wars.

That said, greater scale in video and broadband distribution will be key, supported by a wider relationship with the CJ Group across entertainment and multimedia.

It gives SK a valuable anchor to drive the subscription-based OTT market in 2016 and beyond, and enter into partnerships with key domestic and international players across digital platforms.

DEAL DETAILS

SKT will acquire a 30% stake from CJ HelloVision’s 54% parent CJ O Shopping at W500 billion (US$455 million), close to a 50% premium, and then merge the cable MSO with SK Broadband (SKB) to own 75% of the new business at a 2:1 merger ratio between CJ HelloVision and SKB.

The deal could close by April next year, pending regulatory approval.

SKT has also decided to invest W150 billion in the CJ Group in the form of a capital increase through a third-party allocation, aside from acquiring CJ HelloVision shares.

SKT also has a call option to acquire CJ O Shopping’s remaining stake for a further W500 billion over the next five years, to own 84% of SKB.