Korean conglomerate Lotte and its affiliates have agreed to buy the country's largest car rental company KT Rental for W1 trillion ($906 million), the companies involved in the deal said on Thursday.
The sale will enable KT Rental owner KT Corp to focus on its main telecommunications business, which has been struggling. KT Corp said in June last year that it was looking to sell both KT Rental and KT Capital, which provides lease and instalment finance.
“The asset disposal is credit positive but currently we [still] have a negative outlook on KT Corp,” JunHong Park, an analyst by Standard & Poor's, told FinanceAsia. “On the business side, KT Is facing ongoing pressure in terms of profitability. The fixed line business is declining.”
The sale was conducted via an auction process and, according to Dealogic data, Credit Suisse advised KT Rental while Deutsche Bank advised Lotte, which controls a sprawling enterprise with business interests ranging from sweets to shopping malls.
KT Rental was established in 2005 and merged with Kumho Rent a Car in 2010. Lotte already has a strong credit card business in Korea, which likely explains why it has not acquired KT Capital.
One Seoul-based analyst who covers Lotte but declined to be named said the deal was reasonably priced. “The valuation doesn’t seem to be expensive considering its peer AJ Rent-a-Car is also trading at a high valuation," the analyst said.
Based on 2014 Bloomberg consensus earnings, KT Rental's biggest competitor AJ Rent-a-Car is trading at a price-to-earnings multiple of 17 times and an enterprise-value-to-Ebitda multiple of 4.6 times, the analyst said.
In contrast, KT Rental is trading at a price-to-earnings multiple of 22 to 23 times and an enterprise-value-to-Ebitda multiple of 4.6 times, based on annualised earnings derived from its third-quarter numbers.
However, the synergies to be drawn from Lotte buying into a car rental company aren't entirely clear.
One possibility highlighted by the analyst is that Lotte has an abundant customer data base gathered from its department store memberships and could promote the car rental company to its existing customers.