[THE INVESTOR] The sale of Korean-Japanese retail conglomerate Lotte Group’s financial units in Korea is among the most anticipated deals for the first half of this year due to the impact of the results.
However, the lack of enthusiasm in the preliminary bidding for Lotte Card and Lotte Non-Life Insurance on Jan. 30 is raising speculations on the so-called megadeals.
Lotte Insurance headquarters in Seoul
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While Hanwha Group and Hana Financial Group have joined the bid for Lotte Card as strategic investors, Lotte Non-Life Insurance drew a lackluster response, with no one showing interest. Both the preliminary bids were managed by Citigroup Global Markets Korea Securities.
This is now expected to bungle Lotte’s plan to bundle the three subsidiaries to sell them for up to 3.5 trillion won (US$3.15 billion). This valuation already has huge discrepancies as the market has pegged it at around 2 trillion won.
The lackluster results are expected to lower the company’s valuation during the ongoing bids. Also, market watchers are keen on how the results would affect potential bidders’ entry into a forthcoming preliminary bid for another financial arm Lotte Capital in mid-February.
Insurers on edge
The bid for the Seoul-headquartered Lotte’s insurance arm, valued at some 500 billion won according to the conglomerate, was joined by five private equity firms such as JKL Partners, MBK Partners, Hahn & Company and Orix Private Equity Korea.
They did not include the previously predicted bidders. BNK Financial Group, for one, walked away. Owning provincial banking units Busan Bank and Kyongnam Bank, the group does not have a majority stake in insurers, and has expressed hopes of adding one to its umbrella since 2017. Nevertheless, BNK betrayed such anticipations. Also out of the race are other potential contenders such as the nation’s largest KB Financial Group, and non-bank conglomerate Hanwha Group.
Instead, a company restructuring of the insurer is expected so that the PEFs would take returns, amid the firm’s imperative need to improve financial health, coupled with looming tighter standards on capital adequacy.
Lotte Non-Life Insurance has a 3.1 percent market share, the ninth-largest out of 13 local damage insurers. Its risk-based capital ratio came to 157.63 percent as of the third quarter of 2018, just above the Korean financial authorities’ recommended level of 150 percent. The figure also stands way below the average of Korean damage insurers at 242.8 percent.
Moreover, the industry-wide concerns about the change in accounting standards also raises questions about an insurer’s sustainability in profit-making. Under the new IFRS 17 standards starting 2022, insurance contract liabilities will be calculated as the present value of future cash flows, so the debt size would soar sharply.
Lotte Non-Life Insurance is an indirect subsidiary of Lotte Corp., the Korean-Japanese conglomerate’s local holding firm. The equity capital came to 513.8 billion won. Its shares owned by the Lotte conglomerate in Korea and Japan came to a combined 53.88 percent.
Underlying potential of Lotte Card
There were 10 bidders for acquiring Lotte Card, including Hanwha Group and Hana Financial Group, as well as PEFs MBK Partners and Orix Private Equity Korea.
Missing from the list were Chinese state-owned credit card giant Union Pay, as well as Korean financial groups KB, Shinhan and Woori. They had reportedly expressed interest in the bid.
Lotte Card, also based in Seoul, is wholly owned by entities of the conglomerate, including Lotte Corp., Chairman Shin Dong-bin, and subsidiaries Lotte Capital and Lotte Hotel Pusan. Its equity capital reached 2.2 trillion won, while valuation according to Lotte came to 1.5 trillion won. As of September, Lotte Card took 9.59 percent of the domestic market share.
Bidders are expected to look into the credit card company’s underlying business potential.
For example, Hanwha Group, the explosives-to-retail conglomerate, already owns financial arms, such as Hanwha Life Insurance, Hanwha General Insurance and Hanwha Investment & Securities, but is void of a credit card business arm.
Hanwha is expected to make use of not only the profitability of Lotte Card, but also its accumulated data of over 7 million customers to make synergies with its retail business by department store operators including Hanwha Galleria Timeworld.
For Hana Financial Group, buying a stake in Lotte Card will up its size. The purchase will also leave possibilities of a merger with its credit card unit Hana Card. Moreover, the share purchase will bode well for Hana Chairman Kim Jung-tai’s proclaimed goal to increase the share of profits from non-banking units to 30 percent by 2025.
Lotte Capital, still attractive?
Lotte Capital is the most highly touted company out for purchase among the three Lotte units. Potential bidders include major financial groups KB, Shinhan, Woori and BNK.
The lender’s revenue sources range from installment loans and corporate lending to consumer loans. Its net profit from such business has been on a steady rise. In 2017, its net income came to 117.5 billion won, up 57.1 percent in three years. Its capital came to 1.2 trillion won,
But there are doubts that a private firm under a financial holding company, if acquired, would continue its cash-generating high-interest personal loan business, as similar existing units do not focus on such loans.
Corporate lending is the major focus of non-banking arms of KDB, IBK and Shinhan, while such units of KB, Hana, BNK and JB put emphasis on installment loans for car purchase.
Lotte Tower in Seoul
The news comes amid the retail giant’s move to sell all financial subsidiaries following an imminent end to the transition period.
Under Korea’s Monopoly Regulation and Fair Trade Act, a non-financial conglomerate with a holding company in Korea is prohibited from owning a financial subsidiary -- either directly or indirectly. A conglomerate with a holding company structure is obliged to sell off shares of all financial arms owned by the holding company or its subsidiaries within two years.
Lotte turned Lotte Confectionery into the Korean holding company in November 2017. To be eligible as a holding company, it must sell off its financial subsidiaries by November 2019. It first announced the intent for sell-off in November 2018.
Details of the bid, as to how many shares of each company would be put up for sale, or how bidders -- strategic investors and financial investors -- would team up to buy shares, have yet to materialize. Preferred bidders for each unit will be chosen in the first half of this year.
By Son Ji-hyoung (email@example.com)