According to market sources, South Korean wireless kingpin SK Telecom (SKM) might invest in U.S. video rental chain Blockbuster Inc. Notably, Blockbuster had filed for bankruptcy in September 2010 after years of competitive struggle against Netflix Inc. (NFLX) and online offerings.
The investment is a part of the company’s move to expand its business overseas to generate incremental revenue, given limited growth prospects in the highly matured domestic wireless market. SK Telecom continues to invest in new areas of growth such as wireless Wi-Finetworks and data femtocell, 3G network expansion, introduction of 4G networks and mobile software business. These are expected to boost long-term growth for the company.
SK Telecom is the leader in the Korean wireless market enjoying approximately 51% market share. Despite being the leader, the company is facing greater challenges in maintaining its market position. The carrier currently continues to spend heavily as it is increasing its promotional efforts to contain customer churn amid stiff competition from its major rival KT Corp. (KT), which is aggressively marketing Apple Inc.’s (AAPL) iPhone since November 2009.
We also remain cautious on tariff reductions and high regulation by the Korean ministry, which might hurt the company’s revenues. SK Telecom has reduced usage fees for its wireless Internet services by 30% and also provided free Caller ID service to its customers. The Korean companies also reduced their voice call tariffs by 50% for low-income customers. Thus, the possibility of further rate reductions is an added concern.
Moreover, we believe the investment in the bankrupt company does not generate any synergies to SK Telecom. Instead, it may increase the cost of the company as Blockbuster has a declining business and may require restructuring.
Hence, we are recommending our long-term Underperfom rating on SK Telecom with the Zacks # 5 (Strong Sell) Rank.
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