Why Did Lotte Chemical Acquire Showa Denko Shares on the Market?

Interpreted as a Willingness to Revamp Portfolio
Specialty Business Expansion Expected to Accelerate

[Asia Economy Reporter Hwang Yoon-joo] Lotte Chemical's acquisition of shares in the mid-sized Japanese chemical company Showa Denko is interpreted as a sign of its intention to expand its specialty business.

A chemical industry insider said on the 22nd, "Lotte Chemical did not acquire Showa Denko shares through an off-market block deal but acquired a small amount on the market and then disclosed it," adding, "It is unclear whether the two companies had prior communication, but this is an unusual case. Through this share acquisition announcement, specific opinions on business cooperation or mergers and acquisitions (M&A) may emerge by the end of the year."

Earlier, Lotte Chemical disclosed in its quarterly report that it purchased 4.46% of shares in the Japanese chemical company Showa Denko for 161.7 billion KRW in two rounds in March and April. Showa Denko is the world's number one company in the semiconductor etching gas business sector and acquired Hitachi Chemical last year. At that time, Lotte Chemical also participated in the acquisition battle but lost to Showa Denko.

Lotte Chemical has been expanding its business into the specialty field over the past few years, and it is expected to accelerate portfolio changes due to COVID-19. The acquisition of Showa Denko shares is interpreted in this context.

In the first-quarter earnings conference call, it was stated, "To optimize the portfolio, we may consider M&A of companies with specialty products as well as those with general-purpose products expected to have excellent financial performance," and "We will actively respond to various M&A opportunities based on solid cash flow," which supports this analysis.

In fact, Lotte Group has been strengthening its downstream business through chemical affiliate M&A with Samsung Group in 2016. At that time, it acquired Samsung SDI's chemical business division and Samsung Fine Chemicals, establishing Lotte Advanced Materials and Lotte Fine Chemical respectively. Since then, Lotte Advanced Materials has been actively expanding its business, including acquiring shares in Bellenco, a North American artificial marble manufacturer with high demand.

There is also an analysis that the first-quarter earnings shock was a decisive factor showing Lotte Chemical's intention to strengthen its specialty business. Looking closely at Lotte Chemical's performance, the advanced materials business division and Lotte Fine Chemical posted operating profits of 41 billion KRW and 51 billion KRW, respectively. In contrast, the existing businesses, olefin and aromatics, recorded operating losses of 11.7 billion KRW and 40.7 billion KRW, respectively.

In other words, losses were incurred in the core general-purpose product business. This was due to a decline in petrochemical product demand caused by the COVID-19 pandemic and the suspension of operations at nine plants following an explosion accident at the Daesan plant in March, which worsened profitability. As a result, a consolidated operating loss of 86 billion KRW was recorded in the first quarter, marking the first deficit since 2012.

A Lotte Chemical official drew a line by saying, "The reason for purchasing Showa Denko shares this time is for investment purposes."