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U.S. private equity fund (PEF) manager Texas Pacific Group (TPG) will acquire Lotte Rental, Korea's No. 1 rental car company. It is understood to have gained the upper hand by launching a persuasion drive immediately after a sale fell through early this year. Hankook & Company Group, which had stepped up as a strategic investor (SI), was left behind early.
According to the investment banking (IB) industry on the 12th, TPG the previous day signed a stock purchase agreement (SPA) to acquire management equity in Lotte Rental with Lotte Group units Hotel Lotte and Busan Lotte Hotel. It comes about seven months after a planned sale to Hong Kong PEF manager Affinity Equity Partners (Affinity) fell through in January. (Related article☞[Exclusive] TPG, the No. 2 shareholder of Kakao Mobility, weighs acquisition of Lotte Rental)
The transaction target is a 61.18% management equity stake in Lotte Rental held by Hotel Lotte and Busan Lotte Hotel, and the transaction price is reported to be about 1.3 trillion won. TPG decided to pay the entire acquisition price with its own capital without acquisition financing. The plan is to close the deal within the year after a merger review.
Analysts said TPG's speed and its value-up story to strengthen business-to-business (B2B) operations resonated. It is understood that TPG began approaching the group to acquire Lotte Rental right at the end of January, when the Korea Fair Trade Commission announced it would block Affinity's acquisition of Lotte Rental (a business combination with SK Rent-a-Car).
In particular, Yoon Sin-won, a deputy representative and firm partner who sits on TPG's U.S. headquarters investment committee, personally reached out with a sale proposal. The approach was said to be phased. At first the team met a senior on the working level, then broadened step by step to a manager and then a director, knocking on headquarters' door repeatedly.
This move reflected the fact that after one failed sale attempt, Lotte Group would not open the negotiating table for a mere expression of interest. It is said there were dozens of meetings before TPG met Hwang Min-jae, head of Lotte Corporation's management innovation office, and then dozens more before meeting Lotte Corporation CEO Noh Jun-hyung.
On top of that, TPG presented a plan to grow Lotte Rental into a B2B rental and maintenance business, signaling it was a prepared bidder. In particular, the strategy to shift the interest-spread-driven, finance-centered rental car business toward services such as maintenance earned high marks for sustainability.
An IB industry source said, "For a seller, getting a high price matters, but there is also an expectation that the asset will grow without setbacks," adding, "Given Lotte Group's emphasis on stability, it likely wanted Lotte Rental to grow after the sale without aggressive restructuring such as job cuts."
TPG's decision to buy only existing shares without issuing new shares and to inject its own capital without raising additional funds also factored into Lotte Group's choice of TPG. With Lotte Group's finances weakened to the point that it needs to raise guaranteed bonds backed by Lotte World Tower as collateral, the speed of payment was also a key metric.
TPG signed a memorandum of understanding (MOU) with Lotte Group at the end of May to acquire Lotte Rental. The MOU granted exclusive due diligence and negotiating rights, and Hankook & Company Group (Hankook Tire), which jumped into the bidding in line with Chairman Cho Hyun-bum's parole, could not even proceed with talks due to the exclusive due diligence MOU.
TPG plans to grow Lotte Rental into a B2B-focused rental car company like the U.S. "Element Fleet Management." Mark Fields, an adviser at TPG's U.S. headquarters who previously served as CEO of Ford and CEO of U.S. rental car company Hertz, directly took part in Lotte Rental's due diligence and assessed the business case for strengthening B2B.
B2B services are cited as having more stable cash flow than B2C services, whose results swing with seasonal factors such as vacation periods. Given that Lotte Rental has already built a separate maintenance team, TPG is also said to have set plans to strengthen vehicle maintenance services across B2B.
An IB industry source said, "TPG is a PEF manager that has consistently invested in global mobility companies such as ride-hailing service Uber," adding, "It is also significant that about nine years after its 2017 investment in Kakao Mobility, it is once again betting on a major domestic mobility company."
Meanwhile, Lotte Group has been able to ease its financial burden through the sale of Lotte Rental. Hotel Lotte, the main seller, is shouldering investment burdens for Lotte Construction and Lotte Biologics. In particular, with debt maturities across Lotte Group coming due, the sale proceeds are expected to be used to improve the financial structure.