[Why&Next] Shinsegae Extinguished the 'Urgent Fire'... Who Is the Closer for SSG.com?

Shinsegae vs Private Equity Fund, Put Option Dispute Ends
SSG.com FI Stake to Be Sold to Third Party by Year-End
Shinsegae Gains 6 Months but Financial Burden Remains

Shinsegae Group has concluded the dispute surrounding the financial investors (FI) of SSG.com and the put option (purchase claim right). Shinsegae Group was able to navigate this issue, which could have escalated into an accounting controversy, smoothly during Chairman Chung Yong-jin's first year in office. The FI can recover their invested principal within this year instead of engaging in prolonged legal battles, leading to an assessment that the agreement is a 'win-win' for both parties. However, if Shinsegae Group fails to find new FIs, it will have to repurchase approximately KRW 1.15 trillion worth of shares by the end of this year, indicating that financial burdens remain.

Shinsegae Group Escapes Accounting Controversy... FI Realizes Confirmed Profit

Jung-gu Sunhwa-dong Emart Headquarters. Photo by Jo Yongjun jun21@

According to the retail industry on the 8th, Emart and Shinsegae announced on the 4th that they had signed a contract to purchase shares held by Hong Kong-based private equity firms Affinity Equity Partners and BRV Capital Management. Under this contract, the FI will sell all 1,316,492 common shares (30%) of SSG.com currently held to one or more third parties designated by Emart and Shinsegae by December 31 of this year. The repurchase price is reported to be around KRW 1.15 trillion. Accordingly, the FI will recover more than the investment amount (KRW 1 trillion) made in two rounds in 2019 and 2021.

Previously, the two FIs invested KRW 700 billion in 2019 and KRW 300 billion in 2022, acquiring 15% stakes in SSG.com each time. At that time, the FIs signed shareholder agreements with Emart and Shinsegae in two rounds. Both parties agreed that "if SSG.com fails to meet the total sales requirement (GMV) or IPO eligibility in the 2023 fiscal year, the acquirer may request the major shareholder to purchase all owned shares from May 1, 2024, to April 30, 2027."

The GMV requirement refers to achieving a Gross Merchandise Volume of KRW 5.16 trillion through e-commerce sales. Shinsegae Group stated that SSG.com's total transaction amount in 2022 exceeded KRW 5.7 trillion, fulfilling all contractual obligations, and thus removed the put option liability of about KRW 600 billion and disclosed this. Additionally, Shinsegae Group claimed to have received opinions from multiple IBs selected by the IPO committee confirming IPO feasibility.

However, the FIs argued that SSG.com did not meet either requirement. They claimed that the GMV requirement was unmet when duplicate accounting was removed. They argued that sales revenue from gift certificates and sales recorded when those gift certificates were used to purchase goods were double-counted, inflating the GMV. The FIs also judged that SSG.com did not meet the IPO requirement. They submitted a 'proposal' received during the selection of the lead underwriter, but argued that the proposal is not an 'opinion letter.'

Shinsegae Group entered negotiations after the FI's put option became exercisable on the 1st of last month. The key issue was whether the put option held by the FI was valid. Negotiations showed little progress, and as the FI appeared to prepare for legal battles, the possibility of a 'long-term war' emerged, heightening the sense of crisis on both sides.

Therefore, the industry evaluates this agreement as a 'magnanimous agreement' beneficial to both parties. If both sides engaged in litigation, there could be controversy over the appropriateness of accounting treatment for gift certificate sales. This could lead to investigations by the Financial Supervisory Service for accounting and disclosure violations by SSG.com.

For the FIs, a prolonged battle is also a difficult choice. A representative case is the put option dispute involving Shin Chang-jae, chairman of Kyobo Life Insurance, and FIs such as Affinity, IMM Private Equity (IMM PE), and EQT Partners. This dispute, which began in December 2018, has escalated into litigation and continues to this day. From the perspective of FIs seeking profits, recovering an amount exceeding the principal through an agreement with Shinsegae Group in a relatively short period is far more advantageous than a lengthy legal battle.

Through this agreement, Shinsegae Group has eliminated accounting burdens and gained six months of time. The FIs are expected to recover their principal plus approximately KRW 150 billion in profits.

Shinsegae Group Gains Six Months... New FI Search Expected to Be Difficult

The key issue is whether Shinsegae Group can find new FIs within this year. However, market conditions are not favorable. SSG.com has been struggling with poor performance. Looking at SSG.com's sales trends, it recorded KRW 844.1 billion in 2019, KRW 1.2941 trillion in 2020, KRW 1.4942 trillion in 2021, and KRW 1.7447 trillion in 2022, showing rapid growth. It benefited from the rapid growth of e-commerce during the COVID-19 period.

However, last year it recorded sales of KRW 1.6784 trillion, marking the first decline since the 2018 spin-off. Considering that domestic online shopping transaction volume increased by 8.3% year-on-year according to Statistics Korea, this is a disappointing performance.

Continuous deficits are also a concern. Starting with a KRW 81.8 billion deficit in 2019, it recorded deficits of KRW 46.9 billion in 2020, KRW 107.9 billion in 2021, KRW 111.1 billion in 2022, and KRW 103 billion last year. Therefore, the retail industry expects it will be difficult to find FIs willing to acquire SSG.com's shares. An industry insider said, "Chinese e-commerce companies like AliExpress and Temu are growing through internal investment rather than acquiring domestic companies," adding, "Even the sale of 11st, currently valued at about KRW 500 billion, is difficult."

Shinsegae Group agreed in the share purchase contract that if the FI fails to sell their shares, Shinsegae Group will repurchase them. This is a kind of put option. If Shinsegae Group fails to find new FIs by the end of the year, it must acquire SSG.com's shares for KRW 1.15 trillion, which inevitably imposes financial burdens.

As of last year’s consolidated financial statements, Shinsegae and Emart had cash equivalents of KRW 802.5 billion and KRW 1.7712 trillion, respectively. However, their borrowings at the end of last year were KRW 4.0828 trillion and KRW 7.8745 trillion, respectively. In the first quarter of this year, Shinsegae and Emart’s cash equivalents decreased by KRW 137.8 billion to KRW 1.0321 trillion and KRW 1.4038 trillion, respectively, while borrowings increased by KRW 552.9 billion to KRW 4.2253 trillion and KRW 8.2849 trillion, respectively.

There have been companies that suffered significant losses due to put option contracts with FIs in the past. Kumho Group partnered with FIs to cover insufficient funds during the acquisition of Daewoo Engineering & Construction at the end of 2006. Kumho Group purchased 72% of Daewoo E&C shares at KRW 26,200 per share, of which 39.6% was purchased by FIs.

In this process, Kumho Group signed a put option contract to repurchase the FI’s shares if Daewoo E&C’s stock price fell below KRW 31,500 by the end of 2009. They expected the stock price to reach the mid-30,000 KRW range. However, as the global financial crisis intensified in 2008, Daewoo E&C’s stock price plummeted to the 10,000 KRW range. Consequently, Kumho Group had to return about KRW 4 trillion to the FIs and eventually had to sell Daewoo E&C and its affiliates.

Interest in Whether Shinsegae Group Will Sell Assets

There is also interest in whether Shinsegae Group will raise additional funds through asset sales. On the 5th, Shinsegae Group held the 'CJ-Shinsegae Business Partnership Agreement Signing Ceremony' with CJ Group. Through this collaboration, the two groups agreed to cooperate in logistics. The most notable plan is for CJ Logistics to take over SSG.com’s logistics system. Shinsegae Group stated that they are discussing a phased transfer of two Gimpo NEO centers and a state-of-the-art logistics center built in Opo to CJ Logistics.

SSG.com’s logistics center, 'NEO,' was first introduced in 2014 through 'NEO001' in Bojeong-dong, Yongin. NEO represents a future-oriented online store concept that goes beyond traditional logistics warehouses, with most of the order and delivery processes automated. Currently, along with 'NEO001' in Bojeong-dong, 'NEO002' was built in 2016 in Gochon-eup, Gimpo, and 'NEO003' was constructed next to it in 2019. A Shinsegae Group official said, "Going forward, Gmarket and SSG.com will utilize the delivery network of CJ Logistics, a logistics specialist," adding, "The sale of logistics centers has not been decided yet but is one of the options."

However, Shinsegae Group appears confident in attracting new FIs. A Shinsegae Group official said, "There are many investors interested in SSG.com," and "Since the corporate value of SSG.com has not changed significantly, we believe we can secure investors."