SK, LG, LOTTE: 'Secure Cash!' — Restructuring, Liquidity Drive 'All-In'

[Korea Financial Times, Gwak Horyung] Major South Korean conglomerates are rapidly engaging in a 'cash preservation battle'. Amidst a global economic slowdown and increasing uncertainty, they are focusing on management strategies geared towards survival rather than growth, and defense rather than expansion. As investments and expansions undertaken during the boom years become burdens in the downturn, the entire business community appears to be pursuing restructuring and liquidity securing. Groups are divesting unnecessary assets and reorganizing their portfolios around safe assets and liquidity.

SK Group is extensively carrying out rebalancing (portfolio adjustment), including streamlining overlapping businesses among affiliates and divesting non-core assets. In March, SK Inc. significantly reduced its financial burden by selling an 85% stake in SK Specialty to private equity firm Hahn & Company for approximately KRW 2.6 trillion. Last month, it divested all its shares in Vietnam's VinGroup through a staggered third-party sale.

This marked the full recovery of investments made by major SK affiliates in Vietnam through the jointly invested SK Southeast Asia Vietnam Investment Corporation in 2019. An estimated amount in the early to mid-KRW 1 trillion range was recouped, roughly at the level of the initial investment. Furthermore, the sale of SK Siltron, a semiconductor wafer manufacturing subsidiary, is also being pursued. SK Inc. expects SK Siltron's enterprise value to exceed KRW 5 trillion.

LOTTE, whose credit rating was even downgraded after a liquidity crisis last year, is more committed to cash securing than any other domestic group. The challenge lies in the retail sector, including department stores and hypermarkets, which is primarily domestic-focused and offers limited upside. Lotte Chemical, which heavily expanded facilities during the boom, is struggling with cash generation after being directly hit by the petrochemical downturn originating from China.

Lotte Chemical has initiated securing KRW 2.3 trillion in cash through asset sales in the US, Pakistan, and Indonesia. The group is also making an all-out effort to secure cash by even collateralizing Lotte World Tower, a core group asset, with banks. Hotel Lotte, acting as the holding company, sold Lotte Rental for KRW 2.8 trillion at the end of last year.

LG Group is proactively responding to the crisis through selection and concentration. LG Display sold its 8.5-generation large LCD factory in Guangzhou, China, to TCL CSOT for approximately USD 1.5 billion. LG H&H is pursuing the sale of Haitai htb, its beverage subsidiary, to strengthen its core cosmetics business competitiveness.

Some industry observers analyze that LG H&H is even considering the sale of Coca-Cola (Korea Bottling Co.). LG Chem also divested its Water Solution business (KRW 1.4 trillion) and Aesthetics business including fillers (KRW 200 billion) this year. The Water Solution business was a profitable venture that earned KRW 65 billion in EBITDA last year, and the Aesthetics business was proactively divested despite expectations for future growth, to improve the financial situation shaken by the petrochemical downturn. LG Chem also plans to sell a portion of its shares in LG Energy Solution.

Hanwha Group is heavily benefiting from the defense industry boom, but simultaneously grappling with raising funds to support its petrochemical affiliates. According to the financial investment industry, as of the end of June, maturing debts within one year amount to KRW 2.8 trillion, including KRW 1.825 trillion for Hanwha Solutions, KRW 650 billion for Hanwha TotalEnergies, and KRW 335 billion for Yeochun NCC.

While stopgap measures like borrowings, capital increases, and loans are being used, fundamental solutions for the deficit structure are urgently needed. Hanwha Group is reportedly considering options like divesting its stake in Korea Zinc to raise funds. Hanwha possesses an 8% stake in Korea Zinc through Hanwha Corporation, Hanwha Impact, and Hanwha Power Systems Global.

The current situation where domestic conglomerates are pursuing restructuring and liquidity securing did not arise suddenly. After the COVID-19 pandemic, excessive optimism about petrochemicals, electric vehicles, and batteries encouraged large corporations to expand capital expenditures.

These large-scale capital expenditures were mostly financed through external borrowings, and with interest rates solidifying at high levels in recent years, financial costs have surged, exacerbating corporate financial burdens. An industry official explained, "As the downturn lengthens, it has become difficult to repay maturing bonds. Companies have no choice but to focus on divesting unnecessary businesses and defending cash liquidity." Indeed, the semiconductor, display, and petrochemical sectors have been grappling with prolonged stagnation due to the global oversupply from China, posing difficulties for Korean companies.

Furthermore, US President Trump's 'America First' policy, aimed at 'Make America Great Again (MAGA)', has amplified global economic uncertainty. Analysts suggest that the restructuring of US subsidy policies, including reciprocal and product-specific tariffs and the Inflation Reduction Act (IRA), along with strengthened protectionism, has left domestic conglomerates with no choice but to engage in a 'cash preservation battle'.

Moreover, it is pointed out that various laws and regulations, inevitably having a detrimental impact on overall business activities, are driving companies to the brink in this deteriorating global environment.

The Korea Employers Federation recently held an urgent press conference, appealing to the government and ruling party for careful handling, stating that "the Yellow Envelope Law and the revised Commercial Act are hindering the management and investment of domestic companies."

An industry official remarked, "The expansion of collective bargaining rights for primary and subcontracting companies could lead to indiscriminate spread of strikes, and mandatory cumulative voting could lead to intensifying management disputes and an influx of foreign speculative capital, raising concerns about adverse effects. A major problem is the lack of specific countermeasures beyond government guidelines."

Gwak Horyung (horr@fntimes.com)