LG Chem may spin off its battery business division as continued investment in new battery production plants has been increasing the company’s financial burden. Analysts speculate that the company may seek to raise funds through an IPO of the separated company.
Referring to the speculation, LG Chem recently said that the company was studying various strategic measures to sharpen the battery division’s competitiveness and enhance its business value.
Industry watchers say that LG Chem is highly likely to spin off the battery business division in light of the company’s deteriorating financial structure. Indeed, LG Chem's borrowings have increased rapidly as its cash flow shrank following the end of a petrochemical boom in the first half of last year and its expanding investment in the battery business.
Nice Investors Service said that LG Chem's consolidated net borrowings amounted to 6.87 trillion won in the third quarter of this year. Only until 2017, its net borrowings were not high at 265.9 billion won, but the figure surged to 2.76 trillion won at the end of last year and 6.87 trillion won at the end of the third quarter of this year. Its debt to EBITDA ratio was below 1 before 2017 but rose to 1.4 at the end of last year and 3.0 in the third quarter of 2019.
International credit rating agency Standard & Poor's lowered LG Chem's credit rating from A-(stable) to BBB+ (stable) on Dec. 11 by taking into consideration its aggressive financial policies and a slowdown in the petrochemical industry.
“LG Chem's secondary battery sales are expected to reach 31 trillion won in 2024, but it faces uncertainties such as financial burdens and accidents stemming from rapid battery market expansion,” said Hwang Yoo-sik, a researcher at NH Investment & Securities. “LG Chem’s projected sales in 2020 excluding the battery business division are 20 trillion won, and its battery business is overwhelmingly large for one single petrochemical company. If and when LG Chem spins off its battery business division, it will aim to prevent risks from spreading across the company.”
The spin-off of the battery business division may lead to fund raising through an IPO. “The secondary battery business is expected to require more than 10 trillion won in fresh investment,” Hwang said. “After the spin-off, the division will be able to raise massive funds through an IPO, and increase its investment power by stabilizing its financial structure.”