LG Group’s M&A activity is expected to be strong in the next few years under new head Koo Kwang-mo, as it builds a roadmap for future growth and investment plans, industry analysts and advisors told Mergermarket.
This year and the next are likely to be “eventful” for the company given his strong leadership, Jisan Kim, a corporate analyst at Kiwoom Securities, said.
The South Korean conglomerate, which is anchored in the tech sector, is required to respond to dynamic market changes and is now witnessing investors’ growing expectations for new changes from the fourth-generation ownership. It is expected accelerate a strategic review to realign its businesses, which will result in asset acquisitions or disposals, the analysts said.
LG Group is in the spotlight for active M&A ever since 42-year-old Koo Kwang-mo assumed the chairman position on 29 June 2018 after his father Koo Bon-moo died in May last year. The new chairman studied at the Rochester Institute of Technology and began his career at the financial division of LG Electronics in 2006. The Koo family owns a 48.44% stake in LG Corp, the holding company of 75 affiliates in electronics, semiconductors, chemicals, telecom, healthcare, and consumer, among others.
Since then, the group purchased 10 other companies and sold four of its entities’ shares as of 22 August, according to Mergermarket data. The group has spent more than KRW 1.55 trn (USD 1.33bn) in pursuit of acquisitions compared to disposals valued at more than KRW 768bn (USD 633m).
The largest acquisition was the 50% stake of CJ Hello, the largest South Korean cable operator, for KRW 1.26trn. The group divested a stake in the unlisted logistics firm Pantos Logistics, US-based mine Rosemont Copper Molybdenum, Jiheung, an unlisted electronics value maker, and ServeOne, a B2B MRO (maintenance, repair and operation) company. LG sealed 13 deals worth KRW 1.59trn in 2017 compared to eight deals worth KRW 2.29trn in 2016.
Alongside the holding company, major entities such as LG Electronics and LG Chem are likely to lead M&A activity to strengthen technology in the group’s focused sectors of materials, chemicals, and automotives, among others, the analysts said. LG is the fourth largest chaebol with total assets of KRW 129.6trn as of May 2019.
Overall, the IT sector consists of about 60% of the group’s portfolio, with chemicals constituting 20%, Kim said.
LG Electronics could reconfigure its corporate and business strategy, focusing on improving Fourth Industrial Revolution technologies such as autonomous vehicle technology and the internet of Robotic Things (IoRT), he continued.
LG Chem is also well-positioned in developing battery and advanced materials, key components of the IT industry, Kim said.
LG Group, which established a holdco in 2003, has a “neat” structure, while other chaebols are still battling to resolve cross-shareholding in succession paths, said a Seoul-based advisor. The stabilized structure enables the group to collect its resources for internal strategic reviews and move forward with M&A plans, he said.
LG Chem has acquired a total of two businesses, valued at KRW 174bn (USD 161m), since July 2018.
The company will place its battery business as the top priority for investment and expansion, Dong Jin Kang, an equity analyst at Hyundai Motor Securities, said. However, he was doubtful of the need for acquisitions as LG Chem already has a high caliber battery business.
However, it may seek complementary buys in the Engineering Plastic (EP) business to reinforce its automotive materials, Kang said. Since it takes a lot of time to incubate EP, starting from scratch, acquisitions of operating assets would be logical for LG, Kang noted.
LG Chem would also look to consolidate its grip on OLED materials via any means in line with the growing OLED market, he continued.
The company’s LCD polarizer operating unit is deemed as non-core, since its flagship material Liquid Crystal Display (LCD) has entered a down-cycle phase, resulting in LG Chem gradually shifting its focus to up-and-coming OLED materials, Kang said. LG Chem has also started downsizing its glass substrate unit, he added.
LG Chem was looking for a strategic investor for its LCD polarize operating in China, and LCD glass substrate operating unit in South Korea, respectively, this news service reported in June.
Further, LG Household & Healthcare remains as an influential cash-rich buyer in the consumer sector given its solid track record of acquiring trendy companies and integration, said Hye Mi Kim, a head researcher of Equity Analysis Dept 1 at Cape Investments & Securities. It was one of most acquisitive affiliates within the group, closing four acquisitions and investing about KRW 163bn (USD 135m) in total since last July.
LG H&H will seek ways to strengthen its entire product line and build more premium brands, she added. It will search for a substitute for its crown jewel cosmetic brand ‘Whoo’ to reduce its heavy reliance on the Chinese market. One way of doing this could be through an acquisition.
Despite its financing capacity, LG H&H has preferred small and piecemeal acquisitions valued under or around USD 100m, the first advisor said, adding that it aims to beef up its makeup line.
The company has shown robust M&A activity even before the new chairman came on board and has grown through acquisitions, Kim noted. LG H&H, under management specialist CEO Suk Yong Cha, is regarded as acting rather independently compared to other LG affiliates, she added.
The company has shown steady growth in sales, and therefore drastic changes or asset disposals seem unlikely. However, a restructuring of under-performing household brands is a possibility as it could attempt to convert its daily supplies unit into a premium brand, she said.
LG H&H has three divisions: cosmetics, household products, soft beverages. The cosmetics business comprises 61% of sales followed by household (20%) and the beverage business (19%), according to the company’s 1H19 report. It owns cash and cash equivalents of KRW 518bn as of June-end.
Most recently in April, LG H&H acquired a 100% stake in New Avon, the New York-based cosmetic brand, for USD 125m.
The group is likely to conduct a stake sale or carve outs in sub-segments of its businesses as it actively focuses on the profitability and growth potential of existing operations, said a second sector advisor.
With regard to LG Electronics’ loss-making mobile communications (MC) division, the smartphone maker unit, it could look at options including reducing or spinning off the business, Kim at Kiwoom Securities said.
LG Electronics comprises Home Appliance & Air Solutions, Home Entertainment, Mobile Communications, Vehicle Components Solutions, Business Solutions, LG Innotek and others, including water treatment, according to its 2Q19 report. The MC unit has recorded consecutive losses since 2Q15, recording operating losses of KRW 313bn (USD 257.4m) in 2Q19, the report shows.
LG Innotek’s loss-making units such as High-Density Interconnection (HDI) and Light Emitting Diode (LED) should also be sorted out, he added. The LED unit had operating losses of KRW 22.8bn in 2Q19.
LG Chem is weighing strategic options including a sale for its vaccine business unit, this news service reported earlier this month. South Korea’s Fair-Trade regulatory restriction was also the driver of the stake sale, but it is unlikely that the company will engage in additional deals, the analysts said.
LG Corp sold a 60% stake in ServeOne for KRW 602bn in February 2019 due to regulatory restrictions, as reported. The company is also in talks with private equity firms to sell at least a 35% stake in LG CNS, a system integration company, to alleviate regulatory restrictions, previous reports said.
South Korea’s Fair-Trade regulations restrict inter- trading with affiliates that are 20% (unlisted) and 30% (listed) held by the ultimate owner.
LG Corp and LG Electronics declined to comment. LG Chem did not respond by press time. LG H&H continues to look at opportunistic acquisitions, a company spokesperson said, declining to elaborate.
While it will take time to see synergies from LG’s previous M&A deals, the analysts unanimously said that LG has been on the right track.
The 2018 EUR1.1bn acquisition of Austria-based automotive firm ZWK, the group’s largest deal to this day, was the right move, as it is conducive in the long-term to buy a company that is future-oriented and has high-growth potential, according to Kim at Kiwoom Securities. ZWK develops a premium automotive headlight system and electronics.