[Why&Next] '1.6 Trillion Won' Lotte Rental Big Deal Collapses... Liquidity Securing Scenario in Turmoil

Lotte Rental 1.6 Trillion Won Sale Falls Through After 15-Month Negotiations

With the failed sale of Lotte Rental, valued at 1.6 trillion won, attention is turning to Hotel Lotte's liquidity securing strategy. The sale of Lotte Rental shares by Lotte Group and private equity fund Affinity Equity Partners (Affinity), which had been ongoing for 15 months, ultimately fell through after failing to pass the review by the Fair Trade Commission. While Hotel Lotte is now aiming to seek a new owner for Lotte Rental, there are growing observations that an overall readjustment of Lotte Group's financial strategy is inevitable.

According to the Financial Supervisory Service's electronic disclosure system on May 30, Lotte Rental disclosed a change in shareholding resulting from the termination of its share purchase agreement (SPA) with Carina Transportation Group, a special purpose company (SPC) in which Affinity is a major investor. On May 18, the company announced that the SPA, which would have accompanied a change in the largest shareholder, had been terminated. Hotel Lotte, the largest shareholder of Lotte Rental, and major shareholder Busan Lotte Hotel, had requested approval for a business combination from the Fair Trade Commission as a prerequisite for completing the Lotte Rental share sale transaction, but final approval was denied.

Lotte Rental Sale, Stalled After 15 Months... Nullified by Fair Trade Commission Block

Hotel Lotte had selected Affinity as its preferred negotiating partner in December 2024 to improve its financial structure and secure liquidity. On March 11 of the following year, the main contract was signed. The sale target consisted of about 20,396,594 shares of Lotte Rental held by Hotel Lotte and Busan Lotte Hotel, which represented 56.2% of the total issued shares as of the end of the first quarter this year.

Affinity drew market attention by agreeing to acquire the Lotte Rental shares at 77,115 won per share, with a total acquisition price of 1.5729 trillion won. Considering that Lotte Rental’s share price was below 30,000 won at the time, this amounted to a management rights premium of about 2.6 times the market price.

The industry noted that Affinity had secured management control of SK Rent-a-Car, the second-largest car rental company in Korea, just four months prior to pursuing the Lotte Rental acquisition in August 2024. This move was interpreted as a strategic investment to expand its influence in the domestic rental car market. The high acquisition price was also seen as reflecting expectations for future market dominance.

However, as the Fair Trade Commission did not approve Affinity's acquisition of Lotte Rental, the deal that had continued for 15 months was ultimately scrapped. Although the combined market share of SK Rent-a-Car and Lotte Rental falls short of the 40% threshold for oligopoly, the Fair Trade Commission cited concerns about market competition being limited, given that most rental car companies in the market are small-scale operators. Affinity put SK Rent-a-Car up for sale in an effort to complete the deal, but with no practical gains, the transaction has been halted.

As a result of the Fair Trade Commission's decision, Lotte Rental also withdrew its planned paid-in capital increase. In its public disclosure, Lotte Rental explained that it had considered raising funds to prepare for the loss of benefit from maturity (EOD) and potential early redemption demands on bonds due to the change in the largest shareholder, but with the deal falling through, the necessity for such measures has disappeared.

Hotel Lotte, Lotte Group’s Cash Pipeline... Facing Hurdles in Reducing Borrowings

Lotte Group is now forced to revise its financial strategy, as the expected cash inflow has been disrupted. Hotel Lotte has previously played the role of providing liquidity for the group.

Liquidity pressures across the group are also evident in the financials of the holding company and key affiliates. In fact, Lotte Corporation's cash and cash equivalents have shown a declining trend. As of the end of the first quarter this year, Lotte Corporation held 1.0209 trillion won in cash and cash equivalents, down about 370 billion won from 1.3916 trillion won at the end of last year. In contrast, cash inflows from financial activities during the same period amounted to 2.6528 trillion won. This included 1.6093 trillion won from short-term borrowings, 366.4 billion won from long-term borrowings, and 476.5 billion won from corporate bond issuance, indicating that the company has been filling liquidity gaps through external funding.

Although the structure of borrowings itself cannot be said to have deteriorated rapidly, the burden of maturities is increasing. As of the end of the first quarter this year, Lotte Corporation’s total borrowings stood at 8.4957 trillion won, comprising 3.6086 trillion won in current liabilities and 4.887 trillion won in non-current liabilities. This is about 220 billion won lower than the same period last year (8.7134 trillion won). However, current long-term borrowings due within one year increased from 599.7 billion won at the end of the first quarter last year to 856 billion won this year. This means the burden of responding to short-term liquidity needs is growing as long-term borrowings mature.

The reason the market is focusing on Hotel Lotte’s liquidity is not solely because of the financial burden of its hotel and duty-free affiliates. It is because Hotel Lotte effectively serves as the group’s cash pipeline. Recently, Hotel Lotte has injected capital into Lotte Biologics, which is regarded as a new business for the group. In fact, last March, Hotel Lotte participated in Lotte Biologics’ paid-in capital increase with an investment of 28.6 billion won, thereby serving as a financial resource for the group’s new business investments. That is why the market views Hotel Lotte’s financial status in connection with the group’s overall liquidity.

The problem is that Hotel Lotte is under pressure to repay debt maturing within the next year. As of the first quarter this year, Hotel Lotte's current liabilities stood at 6.0161 trillion won, up 569.5 billion won (10.5%) from 5.4466 trillion won at the end of last year. Meanwhile, its cash and cash equivalents remained at around 479.6 billion won during the same period. In particular, the rapid increase in borrowings due within one year is a burden. Of the current liabilities, borrowings (3.9282 trillion won) and bonds (955.1 billion won) total about 5 trillion won that must be repaid.

The increased borrowing burden at Hotel Lotte is attributable to sluggish performance in its duty-free and hotel businesses during the COVID-19 pandemic. Borrowings increased to secure operating funds at that time, and even after that, financial burdens have continued to accumulate due to the operation of Lotte World Tower, domestic and overseas hotels, and new investment obligations. Furthermore, as Hotel Lotte has taken on the role of investing in the group’s new businesses, the need to secure liquidity has become even greater.

Under these circumstances, the attempted sale of Lotte Rental by Hotel Lotte means more than just restructuring an affiliate. The market interprets this as an effort to proactively secure a large amount of cash by selling off Lotte Rental, a “blue-chip” asset with stable cash-generating power.

Currently, the market does not view Lotte Group’s borrowing structure as being at a crisis level. However, given the increase in short-term borrowings and current long-term borrowings, combined with the cancellation of a planned large-scale asset sale, there is a consensus that the group’s liquidity management strategy, centered on Hotel Lotte, must be revised. This is why there is growing interest in alternative scenarios such as additional asset sales, refinancing, and efficiency measures for non-core assets.

A Lotte Group official stated, "As Lotte Rental is not only the top player in the market but also a highly attractive asset, a variety of buyers have expressed interest in acquiring it. We are currently in discussions with various potential investors and plan to complete the sale of Lotte Rental within the year."

This content was produced with the assistance of AI translation services.