South Korean department store chain Lotte Shopping has emerged the winner in an auction for Chinese retailer Times with a bid that implies a total equity value of HK$4.9 billion ($629 million).
Lotte has agreed to buy the 72.3% of Hong Kong-listed Times that is owned by its controlling shareholder, CS International, at a price of HK$5.575 per share in cash. Lotte will now make an offer to buy out the 27.7% held by minority shareholders at the same price. If it crosses the 90% threshold, Lotte intends to delist Times from the Hong Kong exchange where it has traded since 2007.
The deal is the largest acquisition by a Korean company in China and in Hong Kong. Lotte is advised by Nomura, while Times is advised by HSBC.
The price Lotte has offered represents a 25% premium to the price at which Times traded on Friday before it was suspended. It represents a 48% premium to the average closing price over the last 60 days before the suspension. Times reached a high of HK$4.55 on October 6, up from a low of HK$1.58 on April 28.
Lotte is paying 22 times earnings before tax for calendar 2008 and 19 times earnings before tax for the six-month period ending June 30 this year.
The announcement by Lotte yesterday marks the end of a keenly contested auction for Times. The process was highly competitive and Lotte did in fact not clear the first round of bidding because of concerns regarding whether the Korean firm would be able to close the deal. However, once those doubts were allayed, and with Lotte agreeing to attach few conditions to its bid, the firm became the strongest contender.
Lotte emerged the winner both because of aggressive pricing and because it made an all-cash offer, said a source close to the deal. Beijing-based retail store operator Wumart offered a combination of cash and stock, which did not provide as clean an exit for Times' owners, added the source. This is the second time Wumart has failed to acquire Times. In 2006, Wumart struck a deal with CS International to acquire a 50% stake in the Chinese retailer for HK$1.14 billion, payable half in cash, half in shares. However, Wumart was unable to proceed with the deal and Times raised the capital it needed through an IPO.
Regulatory approvals for the deal are not yet in place, but are not expected to pose a problem, said specialists. Times is currently owned by the Hong Kong-based Fang family, who are dominant shareholders of CS International. Times operates 55 discount stores and 13 supermarkets. Lotte will not become a dominant or monopoly player after the acquisition, said a source.
Lotte Shopping is the retail arm of Korean family-run industrial group (or chaebol) Lotte. The group also has a presence in food, industrials and engineering. Lotte has been in the department store business in Korea since 1979. In late 2007, Lotte acquired the Makro supermarket chain in China from its Dutch owners and proceeded to rebrand the stores as Lotte Mart. Lotte also opened some stores of its own and currently has a presence across Beijing and Tianjin in China through the stores it acquired and opened on its own account.
Towards the end of last year Lotte acquired Makro's hypermarket chain in Indonesia, taking over 19 stores across the country.
Lotte has a market capitalisation of over W9 trillion ($7.7 billion) and earned a profit before tax for calendar 2008 of W927 million. Lotte will be funding the deal from its internal resources. The Korean firm has been building a war chest for acquisitions and the small takeover deals it has struck so far, including Makro and the Belgian chocolate brand Guylian, have barely dented this, said a source.
"The acquisition is relatively modest, accounting for less than 5% of Lotte Shopping's earnings and asset size, and therefore will not have a material impact on the company's financial profile," said Moody's in an update affirming Lotte's A3 rating yesterday. "The rating affirmation is also supported by the company's considerable financial headroom owing to its healthy balance sheet and robust operating performance," the rating agency said.
Lotte is shelling out with good reason. The increased China presence gives the Korean group more bargaining power with suppliers. Simultaneously, Lotte secures a foothold in China's fast-growing retail market. Lotte's share price lost ground on the Korea Exchange on Monday, however, as incomplete details of the acquisition filtered into the public domain and shareholders started worrying that the Korean firm may have overpaid. However, the share price recovered yesterday to close at W315,500.