Transitions into Holding Companies
As Korean conglomerates are transforming into holding firms, methods to dispose of equities in financing subsidiaries are emerging as a key to the success of their transitions into holding companies.
According to the Korean business world on October 2, the Lotte Group was officially launched as a holding company on October 1 but there are still many hurdles to clear. It is also necessary to stop cross-subsidiary shareholdings created by the establishment of the holding company and also meet ownership stipulations of each affiliate. However, it is highly likely that the success of Lotte's holding company framework depends on the disposal of its equities in its financial affiliates. This is because Lotte Engineering & Construction is not able to have financial affiliates under Fair Trade Act. Under the Fair Trade Act, Lotte Holdings Co. has to dispose of its stakes in Lotte Card and Lotte Capital within two years from its foundation. There are many ways. The two companies may be sold off or separated from the holding company structure.
But in the business world, many experts say that both of them will be challenging work. First, it is difficult to predict the success of the sale plan because its financial affiliates are evaluated to have different prices. For example, Lotte Insurance has been said to be a steady M&A target in the Korean insurance industry. Lotte Insurance is an attractive offering to a business group devoid of an insurance business arm although Lotte Insurance has been performing relatively poorly as the Big Five non-insurers have formed a strong five-frontrunner group including Samsung Life Insurance and Hyundai M&F.
"Lotte Insurance is an attractive offering," said an official in the insurance industry. "But Lotte Insurance recently began to make profits and I doubt whether or not the Lotte Group will sell off the growing company."
The situations for Lotte Card and Lotte Capital are somewhat different compared to Lotte Insurance. It is pointed out that the two companies will be hard to sell off as it will not be easy to find buyers of the two and, most of all, the two enjoy synergies with existing distribution affiliates. In the case of Lotte Card, if Lotte Mart or Lotte Shopping enters an overseas market, they are very important in Lotte Card’s building its sales network. In fact, Lotte Card recently bought a local credit card company in Vietnam to support the Lotte Group's distribution business in Vietnam.
If it is not easy to sell off financial affiliates, the Lotte Group may separate them and turn them into an intermediate financial holding company, other affiliates not belonging to the financial holding company structure may buy equities in financial affiliates or Shin Dong-bin, chairman of the Lotte Group may directly buy them. But these options are not easy, either. "It will take a large amount of money to buy them as chairman Shin’s stakes are small," said an official in the Korean business world. "There is no clear solution in the current situation."
The disposition of financial affiliates is a similar burden on the Hyosung Group, which is expected to start a transition into a holding company this year. The Hyosung Group has a financial company named Hyosung Capital and Hyosung Corporation has 97.15% equities in Hyosung Capital. It is highly likely that Hyosung will sell off its stake in Hyosung Capital or Hyosung Group chairman Cho Hyun-jun will take over the stake. Although chairman Cho will more likely to buy the stake now that the Hyosung Group has clarified its position not to sell off its stake in Hyosung Capital, analysts say that it will take 400 billion won to take over the equities and the money will be a burden on chairman Cho.
"It is expected that it will be difficult to sell off Hyosung Capital as the company is linked to the existing import car dealership business," said an official in the Korean business world. “If a disposition method for Hyosung Capital is determined, the Hyosung Group will begin its transition work for becoming a holding company in earnest.”