Holding Companies Lotte Group : Changes Expected Following Holding Company Conversion
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Holding Companies Lotte Group : Changes expected following holding company conversion Spin-off/merger resolutions likely to pass, assuming 60-70% attendance To establish a holding company, four key Lotte Group affiliates—Lotte Overweight (Maintain) Confectionery, Lotte Shopping, Lotte Chilsung, and Lotte Foods—are planning spin-offs and a merger , subject to approval of special resolutions at shareholders’ meetings (requiring the affirmative vote of two-thirds of the shareholders present Industry Report in person or by proxy, comprising at least one-third of total issued shares). August 29, 2017 Assuming a meeting attendance rate of 60-70% (based on historical examples), we believe all four Lotte affiliates will pass the resolutions (considering the stakes held by the largest shareholders and related parties). Mirae Asset Daewoo Co., Ltd. Holding company valued at between W4.1tr and W4.8tr We estimate the fair value of the new holding company between W4.1tr and W4.8tr. [Holding companies/IT services ] We present two sets of valuations, one that does not reflect brand royalties and one that does (based on a 20bp royalty rate, same as LG Corp.’s and SK Holdings’), as Dae -ro Jeong details regarding royalty rates or the timing of collection have not been released. +822 -3774 -1634 [email protected] Combined value of the four affiliates to increase slightly post-spinoff In assessing the fair values of the new holding company and the operating units of the four affiliates, we examined potential changes in each entity’s market capitalization before and after the spin-offs. Our analysis suggests that the combined market capitalization of the four affiliates will increase slightly after the spin-offs, by between 0.4% and 5.6%. All existing circular shareholdings to be untied; new ones to be addressed within required time frame With the upcoming spin-offs/merger, Lotte Group will unwind all 67 of its existing circular shareholding ties. But the changes will also give rise to 12 new circular shareholding structures and six new cross-shareholding structures, which will need to be untied within six months from the date of their establishment, as per the Monopoly Regulation and Fair Trade Act (MRFTA). Within that period (from October 2017 to March 2018), we think Chai rman Shin Dong-bin could directly purchase a 7.8% stake (roughly W312bn) in the holding company from group affiliates as a means to untangle the new circular/cross- shareholding structures and enhance his control over the group. Holding company requirements must be met within two years Lotte’s new holding company must satisfy certain requirements to legally qualify as a holding company within two years of the date of the spin-offs/merger (October 1, 2017). For certain subsidiaries, including the operating units of Lotte Shopping (17.9% stake), Lotte Chilsung (19.3%), and Lotte Confectionery, the holding company needs to meet subsidiary ownership requirements (at least 20% stake for listed firms and 40% for unlisted firms). For this purpose, we think the holding company will r esort to tender offers (equity swaps) or additional share purchases. In addition, due to the ban on ownership of financial subsidiaries by non-financial holding companies under the MRFTA, the new holding company is likely to sell its stakes in financial affiliates, such as Lotte Card (93.8%) and Lotte Capital (25.6%), to Hotel Lotte or other affiliates sitting outside of the holding company structure within the grace period. Expected changes in market capitalization following spin-offs (Wtr) Lotte Confectionery Lotte Shopping Lotte Chilsung Lotte Foods (Wtr) 10 Sum of four companies Investment business 16 Operating business 8 0.9 14 2.0 2.4 12 3.7 4.1 4.9 6 10 8 4 7.6 6.0 6.0 6 1.7 10.3 9.9 9.9 2 1.4 0.6 0.7 2.0 0.7 4 0.1 0.2 1.5 1.5 1.7 1.7 0.1 0.8 1.2 0.7 0.8 0.8 2 0 Current market Post-spin-off Post-spin-off Current market Post-spin-off Post-spin-off Current market Post-spin-off Post-spin-off Current market Post-spin-off Post-spin-off 0 cap (1) (2) cap (1) (2) cap (1) (2) cap (1) (2) Current market cap Post-spin-off… Post-spin-off… Note: Based on closing price as of August 25; (1) does not reflect brand royalties, (2) reflects brand royalties (20bp rate); Source: Mirae Asset Daewoo Research August 29, 2017 Holding Companies In need of shareholders’ approval Spin-off/merger resolutions likely to pass, assuming 60-70% attendance Four key Lotte Group affiliates—Lotte Confectionery, Lotte Shopping, Lotte Chilsung Beverage, and Lotte Foods—are scheduled to hold extraordinary general meetings on August 29th to vote on resolutions required for holding company conversions. Under the resolution, the investment unit of Lotte Confectionery (a surviving entity) will merge with the spun-off investment units of Lotte Shopping, Lotte Chilsung, and Lotte Foods. Mergers and spin-offs require the approval of a special resolution by a majority of shareholders. According to the Commercial Act, a special resolution requires the affirmative vote of two-thirds of the shareholders present in person or by proxy at a shareholders’ meeting, comprising at least one-third of total issued shares. In counting quorum, shares that do not carry voting rights are not included in issued shares. At the shareholders’ meeting concerning the holding company conversion of Hyundai Heavy Industries (HHI), about 66.01% of shareholders were present in person or by proxy. At the meeting to vote on the merger between Cheil Industries and Samsung C&T, the attendance rate reached 83.57%. For controversial, highly-publicized merger/spin-off cases, we would expect the shareholders’ meeting attendance rate to be around 60-80%. In such cases, the group would need affirmative votes from 46.7-53.3% of shares with voting rights. Assuming attendance rates of 60-70% (based on historical cases), we believe all four Lotte affiliates will be able to pass the resolutions, considering the stakes held by the largest shareholders and related parties. The largest shareholders and related parties (excluding Shin Dong-joo, who is against the spin-offs and merger, and related parties) hold 40.7% of voting shares in Lotte Confectionery, 51.9% in Lotte Shopping, 39.8% in Lotte Chilsung Beverage, and 43.0% in Lotte Foods. Table 1. Quorum requirements for shareholders’ meeting Purpose For a meeting For resolution Affirmative vote of majority of Ordinary Electing BOD/BOA and deciding their pay, Affirmative vote of at least one- members present in person resolution approving financial statements, etc. quarter of total issued shares or by proxy Alteration of memorandum, transfer of a Affirmative vote of at least Special whole (or part of a) business division, Affirmative vote of at least one- two-thirds of the members resolution dismissal of BOD/BOA, approval of third of total issued shares present in person or by proxy company split or merger Source: Mirae Asset Daewoo Research Figure 1. Minimum stake s r equired to approve special resolution (varies by attendance rate) vs. major shareholders/related parties’ stake s (%) 100 100 Stake needed for approval 90 Shareholder attendance Largest shareholder and affiliated persons 80 33.3 80 70 30.0 60 26.7 60 23.3 51.9 50 80% attendance 20.0 43.0 70% attendance 40.7 39.8 40 16.7 60% attendance 66.7 60.0 53.3 46.7 20 40.0 33.3 0 Case1 Case 2 Case 3 Case 4 Case 5 Case 6 Lotte Confectionery Lotte Shopping Lotte Chilsung Lotte Foods Source: Mirae Asset Daewoo Research Mirae Asset Daewoo Research 2 August 29, 2017 Holding Companies Table 2. Shareholders of Lotte Confectionery (affiliated persons: 62.73%) (Shares, %) Investment Business Name No. of shares Stake division division Lotte Aluminum 2,172,680 3,823,245 643,382 15.29 Lotte Japan 1,405,960 2,474,055 416,338 9.89 Shin Dong-bin 1,288,680 2,267,680 381,608 9.07 Daehong 464,620 817,587 137,585 3.27 Hotel Lotte 456,700 803,652 135,239 3.21 Shin Kyeok-ho 970,570 1,707,905 287,408 6.83 Shin Dong-joo 562,370 989,597 166,531 3.96 Shin Young-ja 358,730 631,255 106,228 2.52 Lotte Foundation 1,235,760 2,174,557 365,937 8.69 Treasury stock 0 0 0 0.00 NPS 572,824 1,007,993 169,627 4.03 Total shares 14,214,000 25,012,241 4,209,102 100.00 Source: DART, Mirae Asset Daewoo Research Table 3. Shareholders of Lotte Shopping (affiliated persons: 58.46%) (Shares, %) Investment Name No. of shares Business division Stake division Shin Dong-bin 4,237,627 453,335 3,784,292 13.46 Hotel Lotte 2,781,947 297,608 2,484,339 8.83 Lotte E&C 300,019 32,096 267,923 0.95 Fujifilm Korea 2,474,543 264,723 2,209,820 7.86 Hotel Lotte Pusan 246,720 26,394 220,326 0.78 Lotte Confectionery 2,474,543 264,723 2,209,820 7.86 Lotte Chilsung Beverage 1,237,272 132,361 1,104,911 3.93 Lotte Data Communication 1,515,653 162,142 1,353,511 4.81 Seo Mi-kyung 30,531 3,266 27,265 0.10 Shin Yu-mi 28,903 3,092 25,811 0.09 Shin Dong-joo (after selling 5.5%) 2,505,000 267,981 2,237,019 7.95 Shin Kyeok-ho 293,877 31,438 262,439 0.93 Shin Young-ja 232,818 24,906 207,912 0.74 Chang Jae-young 950 102 848 0.00 Chang Sun-yoon 700 75 625 0.00 Yoo Joo-young 499 53 446 0.00 Lotte Samdong Welfare Foundation 47,888 5,123 42,765 0.15 Treasury stock 1,938,688 207,398 1,731,290 6.16 NPS 1,910,990 204,435 1,706,555 6.07 Total shares 31,490,892 3,368,845 28,122,047 100.00 Source: DART, Mirae Asset Daewoo Research Table 4.