South Korea’s leading rental car company Lotte Rental Co. has resumed its initial public offering process,
despite having earlier postponed it, to address the increasing financial burden placed on its parent company Hotel Lotte Co.
The company has received requests for proposals from domestic brokerage firms that are interested in managing the IPO. Lotte Rental plans to select the lead manager after the shortlisted candidates share their presentations this month, according to investment banking sources on Jan. 15.
The Korean car rental company is speeding up the listing process to raise funds since Hotel Lotte's total return swap agreement (TRS) is set to expire soon.
In 2015, Hotel Lotte acquired the country's biggest car rental provider KT Rental, since rebranded as Lotte Rental, for 1.02 trillion won ($928 million) by entering a TRS agreement.
In a TRS agreement, financial investors acquire some shares in the target company on behalf of the primary investor and then receive money in exchange for the shares when the agreement ends.
Lotte Rental shares were split up and acquired by Lotte affiliates and financial investors. Hotel Lotte holds a 42.04% stake in the car rental business, followed by Hotel Lotte Pusan Co. (28.43%) and Lotte Non-Life Insurance Co. (4.9%) as of September 2020.
Lotte Rental's financial investors, including Red Stock Co. and the National Pension Service’s special purpose company Growth Partner Co., hold 5.02% and 19.61% stakes, respectively.
Once the TRS agreement ends, Hotel Lotte will need to buy the combined 24.63% stake from the two companies, which is estimated to cost around 300 billion won ($273 million). The agreements with Red Stock and Growth Partner are set to expire in May this year and November of next year, respectively.
This is likely to push Lotte Rental to go public in the first half of 2022, at the latest, to raise funds given that Hotel Lotte’s financial structure has weakened due to the COVID-19 pandemic.
Once Lotte Rental is listed, Hotel Lotte and the financial investors will be able to pocket returns alongside the liquidity secured by the rental car company through the fundraising.
Meanwhile, Lotte Rental's enterprise value will need to reach at least 2 trillion won ($1.8 billion) to raise the necessary 300 billion won for the investors to exit, according to the investment banking industry.
But it is uncertain if Lotte Rental will be able to fetch the desired valuation, considering it is almost four times the market capitalization of SK Rent A Car Co., the country’s second-largest rental car provider.
While Lotte Rental's revenue is almost double that of SK Rent A Car's, it will be challenging to prove that the company's enterprise value is worth 2 trillion won with just its rental car business, industry experts say.
“The company has limitations in terms of growth potential with just the long-term car rental and used car businesses,” said an investment banking source. “It will need to propose an innovative, new business model similar to the car-sharing platform Socar,
which received a valuation of 1 trillion won.”
Write to Ye-jin Jun at
ace@hankyung.comDanbee Lee edited this article.
