[Exclusive] VIP Asset Management Demands Cancellation of Lotte Rental's Capital Increase

Planned Capital Increase if Affinity's Acquisition is Confirmed
VIP: "Only the Largest Shareholder Benefits, General Shareholders Suffer"
Lotte Rental: "Cash Needed for Early Bond Redemption"
Could Become the First Case under the Revised Commercial Act

VIP Asset Management has called for the cancellation of Lotte Rental's third-party paid-in capital increase. The company argues that this capital increase, which is expected to take place once the Fair Trade Commission's business combination review is completed, would unilaterally benefit the largest shareholder, private equity fund Affinity Equity Partners, which signed an acquisition agreement in March, and would inevitably undermine the interests of general shareholders. This case is likely to become the first application of the revised Commercial Act, which expands directors' fiduciary duty from "the company" to "the company and its shareholders."

According to the capital market and investment banking (IB) industry on June 9, VIP Asset Management has repeatedly raised issues with Lotte since March regarding the capital increase and has demanded its cancellation.

Previously, on February 28, Lotte Rental announced that it would sell a 56.17% stake held by major shareholders Hotel Lotte and Busan Lotte Hotel to Affinity at 77,115 won per share. This price is 2.6 times the then-market price of 29,400 won per share, with a management premium alone exceeding 1 trillion won, making the total deal worth 1.5 trillion won.

On the same day, Lotte Rental's board of directors resolved to issue approximately 7.26 million new shares to Affinity at 29,180 won per share through a third-party paid-in capital increase totaling 211.9 billion won, contingent on the Fair Trade Commission's approval of the business combination. If this capital increase is executed, Affinity's stake could rise to 63.5%. This would also lower Affinity's average purchase price per share by about 16%.

Previously, Affinity had delisted LocknLock through a public tender offer at the end of last year, leading to analysis that an increase in its stake in Lotte Rental could eventually result in a delisting as well.

VIP Asset Management emphasized that Lotte Rental's debt ratio is about 377%, the lowest in the industry, and that it holds more than 450 billion won in cash-equivalent assets, making the capital increase unnecessary. In fact, SK Rent-a-Car, which Affinity acquired, had a debt ratio of 601%, but instead of a capital increase, it opted for early repayment through the issuance of new corporate bonds.

Additionally, after Lotte Rental, whose stock price had consistently remained below its IPO price of 59,000 won per share since its 2021 listing, conducted a 10 billion won share buyback in October last year to enhance shareholder value, it announced a capital increase amounting to 20% of total shares outstanding just five months later. This sequence of events has raised suspicions in the market that Lotte used the capital increase to lower Affinity's average purchase price in order to secure a higher management premium.

Kim Minkook, CEO of VIP Asset Management, stated, "This capital increase lacks justification considering the company's financial condition and is a typical case where general shareholders are harmed," adding, "Because our clients would clearly suffer losses under this structure, we had no choice but to demand that Lotte cancel the capital increase plan in order to protect them."

In response, Lotte Rental explained, "Typically, when a transaction involving a change of major shareholders is completed, it triggers an event of default (EOD) under the bond management agreement, and the company must respond to significant early redemption demands for bonds within about 1.5 to 2 months from the transaction closing date." The company added, "Considering the current status of bond holdings, early redemption of at least 400 billion won and up to 720 billion won is expected, so we decided on the capital increase to minimize the impact on our financial structure." Lotte Rental also said, "Although regulations on securities issuance and disclosure allow for a discount of up to 10% from the current share price, we did not apply any discount and issued at the reference price in consideration of existing shareholders' interests, in an effort to minimize any infringement on their rights."

With the inauguration of the Lee Jaemyung administration, minority shareholders' voices regarding Lotte Rental's capital increase and future actions are expected to grow louder. In particular, the capital increase case could become the first application of the revised Commercial Act, which expands directors' fiduciary duty from "the company" to "the company and its shareholders." This is because the capital increase is likely to proceed as soon as the Fair Trade Commission's business combination review is finalized, possibly as early as next month.

There is also growing attention on the possibility that Affinity could pursue a delisting through a public tender offer, as it did with LocknLock. In the past, public tender offers excluded general shareholders, but this is expected to become more difficult going forward. Kang Hoonshik, who was appointed as the new Chief Presidential Secretary, proposed an amendment to the Capital Markets Act in June last year requiring anyone who acquires more than 25% of a listed company's shares, regardless of management rights, to make a public tender offer for all remaining shares.