Why Did Lotte Chemical Fail to Sell Its Pakistani Subsidiary for the Second Time?

According to the Korea Times on the 15th, Lotte Chemical’s second attempt to sell a non-core subsidiary in Pakistan failed. The group recently proposed plans to enhance the group's competitiveness and support the group's construction sector. The failure to sell the subsidiary triggered concerns among industry insiders, as the department is said to be facing a liquidity crisis. A spokesman for Lotte Chemical declined to comment.

On January 12, Pakistan's Lucky Core Industries announced that its wholly-owned subsidiary Lucky Core Ventures (LCV) had terminated the share purchase agreement signed with Lotte Chemical in January 2023, which was to acquire 75% of the equity of Lotte Chemical Pakistan Limited (LCPL).

LCV stated in the information disclosed by the Pakistan Stock Exchange that the conditions required to complete the transaction could not be met within the time specified in the acquisition agreement. Therefore, LCV has decided not to proceed with the transaction and will withdraw the notice of public announcement of intention.

Coincidentally, just days before Lotte Chemical signed an agreement with LCV, another Pakistani petrochemical company, Novatex, withdrew its proposal to acquire 75% of LCPL shares. The Pakistani company explained at the time that the two sides were unable to agree on the terms of the deal. The terms of the deal are worth approximately US$146 million, and Lotte plans to use the proceeds from the sale to enhance the added value of its existing petrochemical products, expand its specialty chemicals business and enter the eco-friendly materials sector.

Lotte Chemical said at the time that despite the challenges of global economic uncertainty, LCPL's operating profit in 2021 reached 48.8 billion won. However, LCPL was deemed not to be in line with Lotte Chemical's mid- to long-term vision of expanding its high-value-added specialty chemicals business, leading to the decision to sell the subsidiary.

Earlier this month, the company was also reported to have postponed plans for a corporate bond issuance worth up to 400 billion won in February due to growing concerns about the financial soundness of Lotte Construction and other construction companies after Taeyoung E&C filed for debt restructuring. Lotte Chemical is the largest shareholder of Lotte Construction, holding 44% of the shares.

In 2022, Lotte Chemical provided a loan of 580 billion won to Lotte Construction. The reason was that the financing default of the Korean Legoland Resort construction project undertaken by Lotte Construction led to the deterioration of investor sentiment and triggered financial risks. The huge loan at that time even caused South Korea's domestic credit rating agency to downgrade Lotte Chemical's rating. While Lotte Construction has dismissed concerns about its debt, it relies heavily on Lotte Chemical and other affiliates of the group.