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Holding Companies Lotte Holdings ’ Cross Holdings Partially Removed: What to Expect Next

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Holding Companies Lotte Holdings ’ Cross Holdings Partially Removed: What to Expect Next Holding Companies Lotte Holdings ’ cross holdings partially removed: What to expect next Overweight (Maintain) Lotte Chilsung and Lotte Food to sell their 1.3% Lotte Holdings stake Lotte Chilsung and Lotte Food (002270 KS/Buy/TP: W800,000/CP: W567,000) disclosed Industry Report that they will sell their Lotte Holdings stakes (common shares)—0.7% (485,112 shares) and 0.6% (474,148 shares), respectively—to unwind cross holdings created during the December 1, 2017 group’s holding company conversion. The cross holding structures with Lotte Holdings arose after Lotte Chilsung and Lotte Food bought back their own shares during their spinoffs/mergers for holding Mirae Asset Daewoo Co., Ltd. company conversion and subsequently transferred the shares to their operating units . The stake disposal will unwind the resulting cross holdings, which is mandated within [Analyst ] six months from the date of their establishment, as per the Monopoly Regulation and Fair Trade Act (MRFTA). Dae -ro Jeong +822 -3774 -1634 Lotte Holdings’ move to complete holding company structure: What come s [email protected] next Su Yeon Lee 1) Unwinding of the remaining new circular/cross shareholdings (within six months +822 -3774 -7162 from date of merger registration) [email protected] Even after unwinding the cross holdings between Lotte Holdings and Lotte Chilsung/Lotte Food, the group will still be left with eight new circular shareholdings and three new cross holdings, which also need to be untied within six months of the date of their occurrence (i.e., date of merger registration, which is December 12 th , 2017). Within that period, we think Chairman Shin Dong-bin could directly purchase a 7.3% stake (roughly W331.1bn) in Lotte Holdings from group affiliates as a means to untangle the new circular/cross shareholding structures—and, in so doing, further his control over the group. 2) Meeting subsidiary ownership requirement: Purchase of additional stakes for subsidiary inclusion and disposal of stakes in non-subsidiary affiliates (within two years) By law, Lotte Holdings must own at least 20% of its listed subsidiaries and 40% of its unlisted subsidiaries. Currently, the company holds 25.9% in Lotte Shopping, 22.1% in Lotte Food, 8.2% in Lotte Confectionary, and 19.3% in Lotte Chilsung. Hence, Lotte Holdings needs to acquire, at the very least, an additional 11.8% and 0.7%, respectively, in Lotte Confectionary and Lotte Chilsung. For this purpose, we believe the holding company will opt for tender offer/equity swap/rights offering ( new share distribution), as such an approach would not require any additional capital, and would also be beneficial to the majority shareholder from a capital gains tax perspective. In the case of Lotte Shopping, in which Chairman Shin currently owns 9.9%, Lotte Holdings already satisfies the 20% minimum ownership threshold, meaning there is little tax incentive for the majority shareholder (taxes on capital gains resulting from equity swaps for holding company conversions can be deferred, under the current tax code). Therefore, we think Chairman Shin could either directly exchange his Lotte Shopping shares with the treasury shares held by Lotte Holdings, or partially sell them. 3) Disposal of stakes in financial firms (within two years) Under the MRFTA (Article 8-2), Lotte Holdings must sell its stakes in financial affiliates (total of 10, including Lotte Card and Lotte Capital) and non-affiliate financial companies (including BNK Financial Group) within two years. We think Lotte Holdings could decide to keep some financial affiliates, such as Lotte Card, within the group structure through various means (rather than selling its stakes to outsiders), given their potential for synergy effects. More specifically, Lotte Holdings could either: 1) unload its shares in financial affiliates to Hotel Lotte, Lotte Property & Development, or other affiliates sitting outside of the holding company structure; or 2) split itself into a financial unit and a non-financial unit, to comply with the ban on the ownership of financial companies by non-financial holding companies under the MRFTA. December 1, 2017 Holding Companies Lotte Holdings’ cross holdings partially removed Lotte Chilsung and Lotte Food to sell their 1.3% Lotte Holdings stake Lotte Chilsung and Lotte Food disclosed that they will sell their Lotte Holdings stakes (common shares)—0.7% (485,112 shares) and 0.6% (474,148 shares), respectively—to unwind cross-shareholdings created during the group’s holding company conversion. The cross holding structures with Lotte Holdings arose after Lotte Chilsung and Lotte Food bought back their own shares during spinoffs/mergers for holding company conversion, and subsequently transferred the shares to their operating units. The stake disposal will unwind the resulting cross holdings, which is mandated within six months from the date of their establishment, as per the Monopoly Regulation and Fair Trade Act (MRFTA). Table 1. New cross holdings of Lotte Group No. Subsidiary1 Subsidiary2 Subsidiary3 Notes 1 Lotte Holdings → Daehong → Lotte Holdings 44.0% 1.1% Lotte Holdings Lotte Data 2 → → Lotte Holdings Communication Cross holding to be addressed automatically after resolution of circular shareholding 7.7% 2.4% 3 Lotte Holdings → Korea Fujifilm → Lotte Holdings 5.0% 3.8% 4 Lotte Holdings → Lotte Chilsung Beverage → Lotte Holdings Decided to sell the stakes on November 30 th , 19.3% 0.7% 2017; cross holding arising from the 5 Lotte Holdings → Lotte Foods → Lotte Holdings distribution of treasury shares (before spinoff) to the operating subsidiary 22.1% 0.6% Source: Mirae Asset Daewoo Research Table 2. Major shareholders of Lotte Holdings (004990 KS) (shares, %) Lotte Holdings Shareholder Notes # of shares % Shin Dong-bin 7,746,897 10.5 Shin Dong-joo 171,673 0.2 Controlling family’s combined stake of 15.4% Shin Kyeok-ho 2,176,830 3.0 Shin Young-ja 1,195,007 1.6 Shin Yu-mi 42,254 0.1 Lotte Foundation 2,913,988 4.0 Lotte Samdong Welfare Foundation 54,807 0.1 Hotel Lotte 4,808,717 6.5 Lotte Aluminum 4,726,242 6.4 LOTTE CO.,LTD 2,613,965 3.5 Lotte Hotel Busan 389,590 0.5 Lotte Chemical 23,864 0.0 L2 Investment Company 106,151 0.1 Fujifilm Korea 2,832,097 3.8 New cross/circular shareholding structures that will need to be untied within six months Lotte Data Communication 1,734,654 2.4 from date of their establishment Daehong 817,585 1.1 Lotte Chilsung Beverage 0 0 Decided to sell the stakes to untie circular shareholding on November 30 th , 2017 ( ’17.11.30): Lotte Foods 0 0 485,112 shares for Lotte Chilsung (0.7%), 474,148 shares for Lotte Foods (0.6%) Subtotal 32,354,321 43.9 Treasury shares 13,854,113 18.8 Of these, 4.91mn shares (6.7%) will need to be disposed of within five years Total outstanding shares 73,683,000 100.0 Source: DART, Mirae Asset Daewoo Research Mirae Asset Daewoo Research 2 December 1, 2017 Holding Companies Lotte Holdings: What to expect next 1) Unwinding of the remaining new circular/cross shareholdings (within six months from date of merger registration) Even after unwinding the cross holdings between Lotte Holdings and Lotte Chilsung/Lotte Food, the group will still be left with eight new circular shareholdings and three new cross holdings, which also need to be untied within six months of the date of their occurrence (i.e., date of merger registration, which is December 12 th , 2017). Within that period, we think Chairman Shin Dong-bin could directly purchase a 7.3% stake (roughly W331.1bn) in Lotte Holdings from group affiliates as a means to untangle the new circular/cross shareholding structures—and, in so doing, further his control over the group. Table 3. New circular shareholding of Lotte Group No. Subsidiary 1 Subsidiary 2 Subsidiary 3 Subsidiary 4 Subsidiary 5 Subsidiary 6 Notes 1 Lotte Holdings → Lotteria → Daehong → Lotte Holdings Daehong →Lotte Holdings 54.4% 12.5% 1.1% (1.1%, approx. W50 .3bn) Lotte Data 2 Lotte Holdings → Daehong → → Lotte Holdings Communication 44.0% 28.5% 2.4% Lotte Data Lotte Data 3 Lotte Holdings → Lotteria → → Lotte Holdings Communication → Communication Lotte Holdings 54.4% 34.5% 2.4% (2.4%, approx. Lotte Data W106.7bn) 4 Lotte Holdings → Lotteria → Daehong → → Lotte Holdings Communication 54.4% 12.5% 28.5% 2.4% 5 Lotte Holdings → Lotteria → Korea Fujifilm → Lotte Holdings 54.4% 2.1% 3.8% 6 Lotte Holdings → Lotte Corp. → Korea Fujifilm → Lotte Holdings Korea Fujifilm →Lotte 27.7% 56.8% 3.8% Holdings 7 Lotte Holdings → Lotte Logistics → Lotte Corp. → Korea Fujifilm → Lotte Holdings (3.8%, approx. W174.2bn) 18.9% 13.7% 56.8% 3.8% 8 Lotte Holdings → Lotteria → Lotte Logistics → Lotte Corp. → Korea Fujifilm → Lotte Holdings 54.4% 17.3% 13.7% 56.8% 3.8% Source: DART, Mirae Asset Daewoo Research Note: Based on Lotte Holdings’ closing price of W61 ,500 on November 30 th Mirae Asset Daewoo Research 3 December 1, 2017 Holding Companies Table 4. Expected changes in stakes in Lotte Holdings should Shin Dong-bin purchase shares of the holding company to untie circular/cross shareholding structures (shares, %) Current Expected change Notes Shareholders # of shares % # of shares % Shin Dong -bin 7,746,897 10.5 13,131,233 17.8 Shin Dong-joo 171,673 0.2 171,673 0.2 Shin Kyeok-ho 2,176,830 3.0 2,176,830 3.0 Controlling family’s combined stake to increase to 22.7% Shin Young-ja 1,195,007 1.6 1,195,007 1.6 Shin Yu-mi 42,254 0.1 42,254 0.1 Lotte Foundation 2,913,988 4.0 2,913,988 4.0 Lotte Samdong Welfare 54,807 0.1 54,807 0.1 Foundation 4,808,717 6.5 4,808,717 6.5 Hotel Lotte 4,726,242
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