Oct. 19 (Bloomberg) -- LG Telecom Ltd., South Korea’s smallest mobile-phone operator, reported its second straight quarterly profit decline after the company boosted marketing spending to win customers from SK Telecom Co. and KT Corp.

Third-quarter net income fell 6.8 percent to 92.7 billion won ($79 million) from 99.4 billion won a year earlier, the Seoul-based company said today. Sales rose 5.6 percent to 1.27 trillion won.

LG Telecom said last week it plans to merge with affiliates LG Dacom Corp. and LG Powercom Corp. to compete against KT and SK Telecom in luring customers by bundling high- speed Internet with wireless and fixed-line phone services. KT, South Korea’s largest phone and Internet company, bought out its wireless unit earlier this year.

“There is still a big gap in terms of sales and profit between LG and the larger rivals,” Denny Kim, an analyst at Eugene Investment & Securities Co. in Seoul, said. “For LG, things are not going to get better suddenly and it’s more of an issue for the telecommunication market to stabilize as operators rein in marketing costs,” said Kim, who rates LG “buy.”

LG Telecom was expected to report profit of 89.3 billion won on revenue of 1.24 trillion won, according to the median estimate of six analysts surveyed by Bloomberg News.

KT, SK Telecom

KT is targeting sales of 19 trillion won this year and as much as 22 trillion won in 2012. SK Telecom, the nation’s biggest wireless operator, posted sales of 11.7 trillion won in 2008. That compares with the combined 7.7 trillion won in revenue posted by LG Telecom, Dacom and Powercom last year.

LG Telecom shares fell 0.9 percent to 9,020 won at 2:09 p.m. in Seoul trading, while the benchmark Kospi stock index gained 0.2 percent.

Operating profit, or sales minus the cost of goods sold and administrative expenses, declined 9.6 percent to 111.1 billion won, compared with the 113 billion won median estimate in the Bloomberg survey.

Marketing Costs

Marketing costs, which include expenses for advertising and subsidizing users’ handset payments, rose 25 percent to 276.6 billion won. Analysts projected 255.8 billion won.

LG Telecom will offer 2.149 shares for each LG Dacom stock and 0.742 share for every LG Powercom stock, the carrier said last week. The merger, scheduled for completion on Jan. 1, is valued at about 2.1 trillion won based on the new shares to be issued by LG Telecom, Eugene’s Kim said.

The merger “should bring LG Telecom cost savings,” Stanley Yang, an analyst at Nomura Holdings Inc., wrote in a report last week. “LG Telecom’s post-merger marketing strategy will likely be a key share price driver for the Korea telco sector.”

LG Telecom expects the merger to help it pare costs, including marketing expenses, by 0.8 percent to 2 percent of revenue from next year until 2014.

“We believe the company has stated very conservative targets for cost savings, just to be certain” they can reach the stated goals, Kwon Young Joon, an analyst at Mirae Asset Securities Co. in Seoul, wrote in a note dated Oct. 16. “It’s difficult to tell whether new management has focus on profitability or growth,” wrote Kwon, who rates the stock “buy.”

LG Telecom accounted for 18 percent of the Korean mobile- phone market at the end of August, compared with SK Telecom’s 51 percent and KT’s 31 percent, according to the latest government data.

To contact the reporters on this story: Kevin Cho in Seoul at kcho2@bloomberg.net

Last Updated: October 19, 2009 01:10 EDT