With the previously derailed Lotte Rental sale getting back on track after three months, Lotte Group is expected to accelerate efforts to improve its financial structure. Lotte plans to use the roughly 1 trillion won in proceeds for borrowing fund repayment and investments in future growth drivers. Observers said it will help ease the financial burden on Hotel Lotte, which has served as a key funding channel within the group, and secure capacity for new-business investments such as in bio.
According to the business community on the 12th, Lotte on the previous day signed a stock purchase agreement (SPA) to sell a 61.18% equity stake in Lotte Rental held by Hotel Lotte and Busan Lotte Hotel to Texas Pacific Group (TPG), a global private equity fund (PEF), for 1.3105 trillion won. The per-share sale price is 59,000 won, 37.9% higher than the closing price of 42,800 won on the 10th. Lotte Rental, whose predecessor KT Rental was acquired by Lotte for about 1.02 trillion won in 2015, will leave the group after 11 years.
The sale of Lotte Rental is one of the key asset efficiency efforts Lotte has pursued. Earlier, Lotte signed a sale agreement with private equity firm Affinity Equity Partners last year, but the Korea Fair Trade Commission blocked the business combination, derailing the transaction. The reason was that competition could be restricted if Affinity, which owns SK Rent-a-Car, the No. 2 player in the domestic rental car market, also acquired No. 1 Lotte Rental.
The collapse of the sale at the time also became a variable in the group's funding plans. Lotte had drawn up its financing plan on the premise that about 1 trillion won would be secured through the sale of Lotte Rental, but when the transaction fell through, it had to reassess the funding status of key affiliates such as Lotte Corporation and Hotel Lotte. Lotte then continued talks with other potential investors, and by signing a contract with TPG, it partially resolved the uncertainty in capital management.
Lotte Group's financial burden remains high. As of the end of last year, the combined borrowing fund of major affiliates stood at 29.933 trillion won. The size of corporate bonds maturing this year and next at 11 listed affiliates, including the holding company, is also 3.343 trillion won. The market expects that once the transaction with TPG is finalized, the group will secure capacity for capital management and help alleviate Hotel Lotte's borrowing burden.
Hotel Lotte has served as a funding channel for major affiliates such as Lotte Construction and Lotte Biologics. It invested 214.4 billion won in Lotte Biologics' paid-in capital increase last year and plans to inject an additional 464.4 billion won this year and next. As of the first quarter of this year, Hotel Lotte's total borrowings exceed 8.6 trillion won.
Hotel Lotte also has no small amount it needs to spend on its own. Following the remodeling of its Seoul hotel and the purchase of the Lotte New York Palace site in the United States, it is also expanding its overseas management contracts business. A Lotte Group official said, "We plan to use the inflows both to improve the financial soundness of Hotel Lotte and Busan Lotte Hotel and as investment resources to expand our core hotel business."
◇ Reorganizing the portfolio around core businesses
Lotte is working to reduce its financial burden while reorganizing the group's portfolio around core businesses. It is winding down low-profit or noncore operations and focusing on strengthening competitiveness in existing businesses and fostering new ones. In May, it sold Lotte EcoWol, a subsidiary of Lotte Energy Materials, and Lotte Chemical is continuing its business reorganization by selling its Pakistan unit (LCPL).
It has picked the bio business as a future growth driver and continues to make large-scale investments. Shin Yoo-yeol, head of Lotte Corporation's Future Growth Office, was appointed co-CEO of Lotte Biologics this year, taking the helm of the bio business. Lotte Biologics is building a bio campus in Songdo, Incheon. Analysts said that as Hotel Lotte's financial burden decreases, the capacity for new-business investments such as in bio could grow.
The artificial intelligence transformation (AX) is also cited as a key task to boost the group's future competitiveness. Chairman Shin Dong-bin of Lotte Group raised AX as a major topic at the second-half VCM (Value Creation Meeting, formerly the presidents' meeting) held last month and called for strengthening AI capabilities at each affiliate. The plan is not to stop at improving on-site work efficiency but to apply AI to actual products, services, and customer experiences.
TPG, which is acquiring Lotte Rental, is a mega-sized PEF managing about 460 trillion won in assets worldwide. It has invested in global platform corporations such as Uber and Airbnb and is currently the second-largest shareholder of Kakao Mobility. While approval of the business combination by the Korea Fair Trade Commission remains before the transaction closes, observers noted the review burden is not expected to be heavy because TPG does not currently own a domestic rental car enterprise. TPG also plans to conduct a tender offer for the remaining equity after the acquisition.