How Lotte Shopping snagged Hi-Mart

MBK was the preferred bidder, but after the stock price dipped and talks dragged on, Lotte Shopping swooped in as the strategic acquirer of Hi-Mart, Korea's largest electronics retailer.
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Hi-Mart sellers wanted to go with a private equity firm rather than "penny-pinching” Lotte
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<div style="text-align: left;"> Hi-Mart sellers wanted to go with a private equity firm rather than "penny-pinching” Lotte </div>

After a series of dramatic twists and turns that could rival a daytime soap opera, South Korea’s Lotte Shopping is set to buy a 65.25% controlling stake in local electronics discount retailer Hi-Mart for W1.25 trillion ($1.1 billion), edging out private-equity fund MBK Partners, which apparently walked away from the table.

The consortium of sellers includes Eugene Corporation, the company’s former chairman Sun Jong-koo, H&Q Private Equity Fund II and NH Halloween PEF.

A source close to the deal said that each party negotiated a different price. That would make sense, given the varying prices they paid to buy the company.

Construction materials manufacturer Eugene Corp bought Hi-Mart from Affinity Equity Partners and Government of Singapore Investment Corp (GIC) in 2008 for about $2 billion. Affinity and GIC originally paid $769 million for an 80% stake three years earlier. Meanwhile, a consortium including H&Q Asia Pacific and IMM Private Equity bought a 35% stake in Hi-Mart for $257 million in 2010.

Plus, the former chief executive, Sun, has been accused of engaging in embezzlement and other irregularities amounting to $227 million.

“The consortium was committed to sell,” said a source. “And everyone knew the only real buyer in town was Lotte, but everyone also knows that Lotte is an experienced M&A bidder that won’t overpay. Some might even go so far as to say they are cheap.”

So, the source suggested, the consortium was more inclined to go with a private equity firm that might just pay up, “rather than negotiate with a penny-pinching strategic”.

But the market disagreed with the game plan. The day it was announced that MBK had won the bid, the stock market responded poorly to the news, with Hi-Mart’s shares closing down 7.4%. Then, during due diligence, MBK found that Hi-Mart’s second-quarter earnings had fallen by about 20% from a year earlier due to sluggish domestic consumption.

Given that backdrop, MBK apparently tried to negotiate the price down — which of course is precisely what the sellers were trying to avoid with Lotte. At that point, it seems, no one was happy. So MBK walked away from the deal, as a source said, “it would have been a really hard sell to its limited partners”.

Deal rationale
For Hi-Mart the deal makes sense: it’s now part of a bigger organisation that is well placed to distribute its product.

For Lotte Shopping, an affiliate of South Korea’s conglomerate Lotte Group, the synergies are obvious. It doesn’t at present have a strong presence in the discount electronics segment. Hi-Mart is the leading consumer electronics and appliances maker in Korea, with annual revenues of $3 billion and a nationwide network of 308 stores.

But the deal looks even smarter now because E-Mart, an affiliate of Lotte Group’s rival, Shinsegae, announced last week (when MBK was the preferred bidder for Hi-Mart and Lotte Group seemed to be out of the picture) that it was dropping out from the bid for the smaller electronics retailer ET Land. But then the tables turned, and Lotte Shopping suddenly closed the deal and bought itself a product line that its archrival Shinsegae’s E-Mart doesn’t have.

Lotte Shopping said in a regulatory filing it expects the deal to close around September or October. Citi represented the consortium, while Goldman Sachs represented Lotte Shopping.

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