Lotte Looks to Chemicals With $2.6 Billion Samsung Deal

  • Lotte Group to buy Samsung Group's chemical businesses
  • Samsung sells units to focus on electric car batteries

Lotte Group is buying Samsung Group’s chemical businesses for about 3 trillion won ($2.6 billion), in one of the biggest deals among South Korea’s family-run conglomerates as the retail giant seeks growth beyond hotels and department stores.

The group’s chemical arm will take a 31.5 percent stake in Samsung Fine Chemicals Co., which includes 49 percent of Samsung BP Chemicals Co. The company will also buy 90 percent of Samsung SDI Co.’s chemical unit after it’s split off, according to a Lotte statement on Friday.

The Lotte-Samsung deal is the latest in a wave of mergers and acquisitions among chaebols, massive conglomerates run by families of their founders. There has been a spree of deals -- the most in a decade -- driven by generational shift in management and increasing government pressure to simplify their complex ownership structure.

“Lotte is probably doing it to diversify its business and secure its shares in the downstream market,” Han Jae Seung, a Seoul-based analyst at Dongbu Securities Co., said by phone. “The purchase seems to be overpriced and I think it should have been valued at about 2 trillion won.”

Lotte Chemical shares declined 14 percent to 240,500 won, the biggest drop in four years, on Friday. Samsung SDI lost 4.1 percent while the nation’s benchmark Kospi index fell 0.2 percent.

While Lotte Group is looking for ways to grow its business in areas beyond its core operations, Samsung Group has shed less profitable businesses amid a generational transfer of power from Chairman and patriarch Lee Kun Hee, who’s been hospitalized since last year, leaving his only son Lee Jae Yong as heir apparent.

Samsung Succession

“The deal clearly shows the difference in management style between the elder Lee and his junior,” Chung Sun Sup, chief executive officer at corporate researcher Chaebul.com, said. “Lee Kun Hee used to push to expand and diversify Samsung’s business portfolio while Lee Jae Yong is cutting back uncompetitive businesses in order to put more resources into future growth drivers.”

Samsung recently sold off stakes in its chemicals and defense businesses for 1.9 trillion won to Hanwha Group. It completed the transaction earlier this year. Samsung Electronics, Samsung C&T Corp. and four other units sold their stakes in Samsung Techwin Co. and Samsung General Chemicals Co. to Hanwha Group, which has been making explosives for more than six decades.

Samsung said Friday it plans to use proceeds from the sale -- estimated at more than 2 trillion won -- to expand the production line of its electric-car batteries and to strengthen research and development in battery materials.

Family-Feud

At Lotte Group, the deal comes amid a tussle for control. In July, Chairman Shin Dong Bin’s older brother Shin Dong Joo, acting through his father, tried to have his younger sibling fired only to see the plan backfire as the patriarch became sidelined to an honorary position. The case has gained national attention in a country where disputes between family members at corporate dynasties are rarely displayed in public.

Lotte said chemical sales will increase to about 20 trillion won from 14.9 trillion won after the purchase. While the transaction will be completed in the first half of next year, the remaining 10 percent of Samsung SDI’s chemical unit will be transferred after three years, the group and Samsung SDI said in separate statements.

“The outlook for the downstream petrochemical market isn’t so great but by diversifying its portfolio, Lotte can rely on other products when demand for one product wanes,” Jonathan Rhee, an analyst at HMC Investment Securities Co., said by phone. “High value-added products are important to secure because they leave higher profit margins regardless of cyclical market conditions.”

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