Demerger to Be Positive for Remaining Holding Company
The author is an analyst of NH Investment & Securities. He can be reached at dongyang.kim@nhqv.com. -- Ed.
Having decided to spin off LG Corp, the LG Group is taking the steps necessary for completing the separating off of its affiliates, including LGI (with Pantos), Siliconworks, LG Hausys, and LG MMA. The remaining holding company is to generate steady earnings growth by focusing on its core businesses, adhering to the current dividend structure, and seeking new business opportunities. Re-valuation looks likely for the newly established holding company, but it will need to navigate new challenges.
To establish remaining holding company-new holding company structure: Spin-off ratio of 0.91:0.09
Seeking to beef up its business competitiveness, the LG Group has decided to spin off LG Corp. The spin-off ratio is to be 0.9115879 (remaining holding company):0.0884121 (new holding company). The to-be-created new holding company will control LG International (LGI; including Pantos), Siliconworks, LG Hausys, and LG MMA. A special resolution at a planned general meeting of shareholders next year is to ratify the separation into a remaining holding company-new holding company structure, with re-listing to take place at end-May 2021.
Although the market values of the new holding company’s affiliates appear undervalued, the sum of their contributions to LG Corp’s cash inflow (in the form of dividend income and brand royalty income) is 9%, a level on par with the spin-off ratio. After the spin-off event, we expect the remaining holding company to adhere to the current dividend structure (ie, more than 50% of NP in non-consolidated financial statements).
Demerger to create new holding company; growth prospects for remaining holding company to strengthen further
In addition to stronger business competitiveness, another reason behind the planned spin-off is achieving separation of affiliates. Since the inauguration of Chairman Koo Kwang-mo in 2018, the market had been expecting a Koo Bon-joon (7.7% stake in LG Corp)-led spinning off of some affiliates. After the spin off, the LG Group is expected to take the steps necessary for completing the separating off of its affiliates via share swaps between founding family members at the two holding companies.
Moving ahead, we believe that the remaining holding company will generate steady earnings growth by concentrating on its core businesses (ie, electronics, chemicals, and telecom) and taking advantage of its steady cash flow and strong financial statements to seek new business opportunities. Meanwhile, valuation re-rating should be in the cards for the new holding company on the back of both improved efficiency for decision-making and the listing of its affiliates. That said, it will need to navigate the new challenge of securing external customers and to deal with the phasing out of coal-generated power.