[NEWS IN FOCUS] Lotte Chemical’s acquisition of Iljin Materials causes concern

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[NEWS IN FOCUS] Lotte Chemical’s acquisition of Iljin Materials causes concern

Lotte Chemical's Yeosu plant in South Jeolla [LOTTE CHEMICAL]

Lotte Chemical's Yeosu plant in South Jeolla [LOTTE CHEMICAL]

Lotte Chemical’s acquisition of Iljin Materials may not be coming at the best possible time, as the chemical company is already having a tough time making profits and keeping the business afloat.
 
Lotte signed a purchase agreement with Iljin Materials in October, acquiring 53.3 percent of the copper coil manufacturer for 2.7 trillion won ($2.04 billion). It is part of the chemical company’s attempt to expand its business portfolio to the fast-growing electric vehicle (EV) battery material industry.
 
Of the 2.7 trillion won, Lotte said some 1.7 trillion won will be raised through loans from commercial banks while the remainder will come from its own capital. The chemical company only has until the end of February to close the deal, but it is still uncertain how the company will finance the money. 
 
“The cost of the 2.7-trillion-won acquisition deal is higher than initially forecast,” said Lee Jin-ho, an analyst from Mirae Asset Securities. “Short-term funding could be burdensome.”  
 
Earlier in the month, Lotte Chemical announced that it will issue 8,500,000 new shares at 130,000 won each. Of them, some 605 billion won will be used to acquire Iljin Materials.  
 
“Lotte Chemical has reached the conclusion of issuing new shares, which is the worst scenario for shareholders, amid a series of misfortunes including the burdensome acquisition prices, lower-than-expected earning reports and growing credit crunch risks,” said analyst Han Seung-jae from DB Financial Investment.  
 
Borrowing 1.7 trillion won from banks is also a challenging task.  
Lotte’s Chief Financial Officer Kang Jong-won said earlier that the company has been in discussion with numerous financial institutions for the loan including the Korea Development Bank (KDB). The final announcement will be made within the year, Kang said.  
 
“Lotte Chemical will have 1.1 trillion won in cash at the end of 2022, meaning that it will need to borrow 1.6 trillion won or more,” Lee from Mirae Asset Securities said. “Following the acquisition, Lotte Chemical’s net debt ratio will jump from 6 percent to over 23 percent, with tepid earnings and rising interest rates likely increasing borrowing costs.”  
 
The interest rate of the business acquisition loans stands at some 8 percent in November compared to 4.4 percent in October. The Bank of Korea recently raised its base rate by a quarter percentage point to 3.25 percent, the sixth increase in a row.  
 
Lotte Chemical Vice President Kim Gyo-hyun talks at a press conference Thursday. [YONHAP]

Lotte Chemical Vice President Kim Gyo-hyun talks at a press conference Thursday. [YONHAP]

 
The financial situation isn't good anyway for the chemical company. It swung to a net loss in the third quarter amid sluggish demand for petrochemicals. It reported 31.1 billion won in net loss in the July-to-September period compared to 312.9 billion won of profit during the same period last year.  
 
It recently used billions of won to support financial aid to Lotte Engineering & Construction (E&C), its construction subsidiary that is financially struggling due to a liquidity crunch stemming from the Legoland-related default.  
 
Lotte Chemical bought 87.6 billion won worth of Lotte E&C’s shares on Nov. 18, and decided to lend another 500 billion won to the construction company. Lotte Fine Chemical will lend 300 billion to Lotte E&C.
 
Credit information providers are rushing to lower the credit ratings of Lotte Chemical.
 
Nice Information Service maintained the AA+ rating for the chemical company, but changed its prospects from “Stable” to “Negative.”  
 
Korea Investors Service and Korea Ratings also changed their prospects to “Negative.”  
 
“Concerns over Lotte Chemical’s acquisition of Iljin Materials are rising due to its high acquisition price,” said analyst Lee Dong-wook from IBK Investment Securities.  
 
“But for Lotte, it has no choice but to buy Iljin at the high price considering Iljin’s presence in the copper foil industry such as its top-tier technology, experience and know-how and a pile of orders from major battery companies.” 
 
KRX-listed Iljin Materials is the world's fourth-largest manufacturer of copper foil, a core component in making anodes, which are used in lithium-ion batteries for EVs. Copper foil functions as the negative pole, which lithium ions flow toward from the positive pole as a battery releases electricity. Around 35 to 40 kilograms of copper foil is required to make an EV.
 
Iljin Materials currently has 60,000 tons of capacity at plants in Korea and Malaysia. It plans to build more plants in the United States and Spain to expand capacity to 230,000 tons by 2027.  
In June, it signed an 8.5-trillion-won supply deal with Samsung SDI.
 
It had a 13 percent market share last year, after SK Nexilis, China's Lingbao Wason Copper Foil and Taiwan's Chang Chun, according to data from SNE Research.
 
Iljin Materials reported 34.1 billion won in net profit in the first half, up 1.7 percent on year. Revenue came in at 388.5 billion won with 46.8 billion won of operating profit.

BY SARAH CHEA [chea.sarah@joongang.co.kr]
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