[M&A Insights] Lotte Accepts 'Put Option'... What Will SK Do with the 'Call Option'?

Lotte Group Accepts 380 Billion Won Put Option for Lotte Global Logistics on May 12
Smooth Resolution with Private Equity Fund Just 10 Days After IPO Withdrawal Seen as Unusual
In 2023, SK Group Shocked Market by Not Exercising 11st Call Option
National Pension Service Invested 380 Billion Won... Attention on Whether SK Will Exercise Call Option at End of October

Lotte Group's acceptance of the put option exercised by the private equity fund (PEF) that invested in its logistics subsidiary, Lotte Global Logistics, has brought renewed attention to 11st, which is currently undergoing a sale process after SK Group chose not to exercise its call option. This renewed focus is due to the fact that 380 billion won from the National Pension Service has been invested in 11st, and because the two-year window for SK to exercise its call option will open again at the end of October.

Lotte Group's Decisive Execution of the Put Option Agreement

On May 12, Lotte Holdings announced that it would repurchase shares from LLH LLC, the second-largest shareholder of Lotte Global Logistics, which operates parcel delivery and international express businesses, in response to the exercise of a put option. Previously, in 2017, PEF H Private Equity invested 279 billion won in Lotte Global Logistics through the special purpose company (SPC) LLH LLC, acquiring a 21.87% stake. Now, Lotte Holdings, the largest shareholder (46.04%), and Hotel Lotte, the fourth-largest shareholder (10.87%), are jointly buying back this stake for a total of 380 billion won. This announcement came just 10 days after Lotte Global Logistics disclosed its withdrawal from a planned IPO, leading many in the capital market to describe the move as "unusual."

In large-scale share purchase agreements, investors typically include various safeguards in shareholder agreements, such as put options, to prepare for the possibility that exit opportunities like an IPO might not materialize. However, it is rare for investors to actually exit through the exercise of put options. As seen in the Kyobo Life case, protracted legal disputes between shareholders are more common. Therefore, many observers find it quite refreshing that, in the case of Lotte Global Logistics, a decision was reached quickly through shareholder consensus.

Growing Interest in SK Group's Handling of 11st

Lotte Group's unusual acceptance of the put option without dispute has shifted the capital market's attention to the fate of online retailer 11st. In 2018, PEF H&Q Korea, the National Pension Service, and MG Community Credit Cooperative formed a consortium and acquired an 18.18% stake in 11st for 500 billion won through the SPC Nile Holdings LLC.

At the time, SK Square, the largest shareholder (80.26%), and Nile Holdings included a "Call and Drag Along Option" clause in their shareholder agreement: if an IPO failed within five years, SK Square would either exercise a call option to buy back the consortium's stake, or, if SK Square declined, the consortium could trigger a drag-along right to initiate a sale process. While a put option would have been safer for financial investors, it is understood that the call and drag along option was used instead to avoid the put option being recognized as a liability on SK Square's balance sheet and to reduce the burden on the major shareholder.

However, as 11st's performance continued to deteriorate and the IPO failed, the first call option exercise window arrived at the end of October 2023. Contrary to market expectations, SK Square opted not to exercise the call option, which came as a shock. Subsequently, the financial investors exercised their drag along right, initiating the sale process for 11st. Although SK Square has since replaced 11st's management and made significant efforts, distrust in the online retail sector has deepened due to incidents involving TMON and WEMAKEPRICE, resulting in a sluggish sale process.

Ultimately, with SK Square's call option exercise window recurring every two years and the next deadline approaching at the end of October, the likelihood of a sale being completed before then is slim. Lotte Group's clean execution of its shareholder agreement has inevitably increased attention on SK Group's forthcoming decision. An investment banking industry source commented, "Interest in the National Pension Service's investment recovery has risen among the public due to the Homeplus incident, so SK Group may respond differently this time." Of the consortium's total investment of 500 billion won, 380 billion won is reported to have come from the National Pension Service. The third blind fund from H&Q Korea, which invested in 11st, has an internal rate of return (IRR) of 22% even after valuing 11st at zero, making the investment particularly critical for the National Pension Service in terms of recovery.