Korea's Lotte buys GS department and discount stores

Lotte Shopping pays aggressively to consolidate its position in South Korea, acquiring three department stores and 14 discount stores from GS Retail for $1.12 billion.

South Korea's Lotte Shopping Group will acquire GS Retail's department and discount store units for W1.3 trillion ($1.12 billion).

Lotte is taking over three GS Square department stores and 14 GS Mart hypermarkets or discount stores, increasing its portfolio of department stores in Korea to 33 and its discount stores to 83. The South Korean retail chain dominates the department store segment in Korea, but ranks third in the hypermarket segment after Shinsegae's E-Mart chain and Tesco's Home Plus network. With this acquisition, Lotte will consolidate its position in the hypermarket segment enough to both put a significant gap between itself and the number four player, and to become a significant runner-up to the first two.

Lotte is paying aggressively for the asset, underscoring how strategic it believes the purchase is. It is paying 1 times gross sales and around 1.7 times net sales, said specialists. Analysts estimate it is paying 10 to 11 times Ebitda.

The deal is the biggest ever acquisition by Lotte and follows on the heels of its $629 million takeover of Chinese supermarket operator Times in October last year.

GS decided late last year to sell its department stores and discount stores, to allow itself to enhance focus on its core supermarket and convenience store business. It is expected that GS will use a substantial part of the proceeds from the sale to retire debt.

Barclays Capital ran an auction for the portfolio of stores on behalf of GS. It was conducted as a one-stage limited auction and GS and its adviser chose to simultaneously issue an information memorandum and allow qualified buyers access to a data room.

"Serious buyers had a high level of familiarity with the assets and so a one-stage process was efficient in terms of both time and effectiveness," said a source close to the situation.

The department stores and discount stores were offered separately, not as a package, and Lotte happens to have emerged the winner for both. Lotte was always the frontrunner, but the process allowed for price discovery and for an aggressive timetable to be met. Private equity buyers were never expected to be strong contenders for these assets.

Lotte won the assets based on price, but also on other parameters including certainty and its commitment to continuing to employ more than 2,500 employees of the GS department stores and discount stores. Bank of America-Merrill Lynch advised Lotte on the deal.

The deal still has to secure the approval of Korea's Fair Trade Commission, but this is expected to be largely a formality given Lotte's relative position in the market and the limited overlap of the acquisition with Lotte's own network.

Lotte is expected to raise new debt to fund the deal. Moody's yesterday placed Lotte's A3 issuer rating on review for possible downgrade.

"The acquisition should further pressure Lotte Shopping's financial profile which has already been weakened by a series of acquisitions over the recent few quarters," the rating agency said. "Although the company's robust performance will partly alleviate pressure on its leverage, the company's debt/Ebitda will likely increase beyond 2.5 times in 2010, which is weak for the A3 rating."

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