[Why&Next] Fallen Bicycle... Will Youngone Corporation Fall into the Winner's Curse?

Youngone Exercises Call Option on Scott Shares
Secures 100% Ownership After Acquiring Management Rights in 2015
Bicycle Market Shrinks... Over 100 Billion KRW Loss Last Year

Will it be a 'winner's curse'? Youngone Corporation has settled a dispute with the second-largest shareholder of its bicycle subsidiary, Scott. After international arbitration, Youngone expanded its control over Scott, but the outlook remains bleak. The 'riding boom' that surged during the COVID-19 pandemic has subsided, leading to deteriorating performance, and there are no signs of recovery in the bicycle market.

According to the Financial Supervisory Service's electronic disclosure system on the 19th, Youngone held a board meeting earlier this month and decided to exercise a call option (the right to purchase shares at a predetermined price) on all Scott shares held by Scott founder Beat Zaugg.

Photo of Scott Korea homepage

Youngone Corporation Ends Dispute with Scott Founder After Two and a Half Years

Youngone operates an apparel original equipment manufacturing (OEM) business and the premium bicycle business ‘Scott.’ The OEM produces and exports sportswear, shoes, bags, and more. As of September last year, the OEM manufacturing business accounted for 68% of Youngone's total sales, while Scott accounted for 27%.

Scott is a premium bicycle manufacturing and sales company based in Switzerland, founded in 1958. It mainly deals in mountain bikes and currently operates in over 60 countries, including North America and Europe. Scott bicycles are priced from several million to tens of millions of Korean won, classifying them as high-end bicycles.

Youngone entered the bicycle market in 2013 by acquiring a 20% stake in Scott. In 2015, it purchased an additional 30.01% stake, becoming the largest shareholder with 50.01%. During this process, Youngone signed a shareholders' agreement with Scott founder and second-largest shareholder Beat Zaugg regarding joint company management.

However, cracks appeared in the shareholders' agreement seven years later. In September 2022, Youngone filed for arbitration with the International Chamber of Commerce (ICC), alleging that Beat Zaugg had seriously violated the shareholders' agreement. Beat Zaugg filed a counterclaim in April 2023. After two and a half years, on the 5th, the ICC ruled to end the joint operation between Youngone and Scott. The ICC recognized Beat Zaugg's violation of the shareholders' agreement and confirmed Youngone's call option rights on the Scott shares held by Beat Zaugg.

Youngone immediately decided to exercise the call option on all Scott shares held by Beat Zaugg, securing 100% ownership of Scott. The acquisition price has not yet been determined and will be decided after valuing the shares according to the procedures set out in the existing shareholders' agreement.

Bicycle Market Collapse... Scott Faces Operational Difficulties and Mounting Debt Due to Inventory Build-up

Sung Ki-hak, Chairman of Youngone Corporation, serving as the President of the Korea Federation of Textile Industries.

Scott is a bicycle business promoted by Youngone Chairman Sung Ki-hak as a new growth engine after the outdoor brand ‘The North Face’ showed stagnant performance. It is reported that Youngone invested over 150 billion KRW to acquire a majority stake in Scott.

However, Scott increased Youngone's financial burden from the start. In 2015, the first year after becoming a subsidiary, Scott recorded an operating profit of about 8 billion KRW but turned to losses the following year, suffering operating losses in the 20 billion KRW range for two consecutive years.

From 2018, Scott rebounded to profitability, and in 2020, during the COVID-19 outbreak, a boom in electric bicycles (E-BIKE) swept Europe, leading to rapid growth. In 2020, sales exceeded 1 trillion KRW for the first time, and operating profit surpassed 100 billion KRW the following year. However, performance declined after peaking in 2022. In 2023, sales dropped 11% year-on-year to 1.2424 trillion KRW, and operating profit fell by 66%.

By the third quarter of last year, cumulative sales had decreased 26.57% year-on-year to 722.5 billion KRW, with an operating loss of 105 billion KRW, marking a return to the red. This was due to reduced global bicycle market demand following the transition to the COVID-19 endemic phase, leading to decreased sales and inventory accumulation. Over 80% of Scott's sales come from the bicycle business.

Scott is experiencing management difficulties due to worsening profitability. Youngone lent 150 million Swiss francs (about 230 billion KRW) in December 2023 and extended the loan period last December. Additionally, Youngone has provided debt guarantees totaling 422.8 billion KRW. Notably, Scott borrowed 170.9 billion KRW from HSBC Bank in March last year and, within just three months, took out new loans totaling 176.7 billion KRW from Woori Bank and Shinhan Bank. In December last year, Scott also borrowed 75.1125 billion KRW from Shinhan Bank. Scott's debt grew from 309.7 billion KRW in its first year as a subsidiary to 1.008 trillion KRW by the end of 2023. As of the end of September last year, it stood at 850 billion KRW.

This has increased Youngone's financial burden. As of the third quarter last year, Youngone's consolidated cumulative operating profit was 342 billion KRW, down 200 billion KRW (39%) from 558 billion KRW a year earlier. The OEM business's operating profit decreased by 77.7 billion KRW, influenced by Scott's operating profit plummeting by about 150 billion KRW.

In the securities industry, forecasts suggest that Youngone's consolidated operating profit for last year will decline by about 40-50% compared to the previous year. Huh Jae-na, a researcher at DB Financial Investment, said, “Scott is recording continuous operating losses due to high inventory levels,” and predicted, “The deficit will continue through the first half of this year as a rigorous inventory reduction process takes place.”

Park Hyun-jin, a researcher at Shinhan Investment Corp., commented, “There may be some base effects in Scott's business division in the first half of this year, but there is insufficient evidence to predict a fundamental demand recovery,” and emphasized, “It is important to strengthen the OEM division's resilience to offset Scott's poor performance.”