[Governance] Amore Succession Priority Seominjeong... Hindered 'Road Shop Plan'

[Analysis and Graphic by Heejin Lim]

[Asia Economy Reporter Park So-yeon] Amorepacific Group Chairman Seo Kyung-bae holds 53.78% of the shares in the holding company Amorepacific Group (AmoreG), controlling the entire group. Born in 1963, Chairman Seo is 60 years old this year, making it premature to discuss succession, but in the business community, his eldest daughter Seo Min-jung, the group's second-largest shareholder, is considered the top candidate for succession.

In the financial investment industry, there is a high expectation that other affiliates will merge with the core subsidiary Amorepacific in the future, just as Estra and Amorepacific merged last year. This refers to mergers among subsidiaries under AmoreG, such as Amorepacific and Innisfree. It is part of the succession process.

◇Likely future scenarios for governance restructuring= Seo Min-jung holds 18.18% of Innisfree, 19.52% of Etude, and 19.52% of Espoir, all subsidiaries of AmoreG. If these brand shop affiliates merge with Amorepacific, Seo will acquire shares in Amorepacific.

When AmoreG conducts a paid-in capital increase and Seo participates, she can contribute her existing Amorepacific shares as a non-cash contribution. Although most of the new shares' consideration is cash, according to prior agreements with investors, real estate, equipment assets, securities, or specific business divisions can be paid instead of cash.

If Seo contributes 100% of her Amorepacific shares to the holding company AmoreG as a non-cash contribution, she can receive new shares of AmoreG of equivalent value.

As a result, shares of unlisted affiliates can be converted into shares of the top holding company. This is a way for Seo to secure AmoreG shares without additional capital input.

Currently, Seo holds 2.93% of Amorepacific Group shares, making her the group's second-largest shareholder after Chairman Seo. Seo Min-jung has steadily accumulated shares of the holding company Amorepacific Group (AmoreG) since her teenage years, mainly by participating in paid-in capital increases and acquiring convertible preferred shares.

A financial investment industry insider said, "After nurturing the affiliates well, merging them with Amorepacific (AP), and then contributing the resulting AP shares to AmoreG as a non-cash contribution, Seo can receive new shares of AmoreG. This is a way to avoid gift tax of nearly 40%."

The problem is that the corporate value of the so-called 'Seo Min-jung 3 companies,' the road shop brands, has significantly declined. In the past, the boom in cosmetic brand shops allowed these unlisted road shop affiliates to serve as a solid source of funds for Seo through large dividends. However, following the THAAD (Terminal High Altitude Area Defense) retaliation and the COVID-19 pandemic, some affiliates have reached a state of complete capital erosion.

As the industry expects, to successfully nurture the road shop affiliates, merge them with Amorepacific, and then exchange them for new shares of the holding company AmoreG, the higher the value of the merged brand shop affiliates, the more advantageous it is for securing shares. However, the declining popularity of cosmetic brand shops is hindering the succession process.

◇Road shops transformed from 'cash cows' to 'ugly ducklings'= Etude maintained a steady net profit of about 10 to 20 billion KRW annually and a no-debt policy supported by cash assets of around 20 billion KRW, serving as a stable cash reserve within the group. However, it suffered significant damage to sales due to China's THAAD retaliation in 2017. The sharp decline in Chinese tourists led to decreased sales at domestic duty-free shops and department stores, and road shop stores directly operated in China were also affected.

After more than a decade of steady profits, Etude turned to a loss in 2018. Due to continued sales decline, it has recorded operating and net losses since 2018. From 2020, it reached a state of complete capital erosion due to decreased equity and increased borrowings caused by poor performance. The no-debt policy that Etude had maintained for decades collapsed. Borrowings increased from 8 billion KRW in 2018 to 20 billion KRW in 2019, 32 billion KRW in 2020, and 41 billion KRW in 2021. During the borrowing process, the holding company Amorepacific Group provided deposits as collateral.

Innisfree and Espoir are in similar situations. In 2012, Chairman Seo transferred 44,450 shares (18.18%) of Innisfree he held to Seo Min-jung. Innisfree's sales peaked at 767.9 billion KRW in 2016 but have continuously declined since. Sales in 2021 were 307.2 billion KRW, down 60% from 2016. Last year, it recorded its first operating loss since establishment.

Despite this, Innisfree caused controversy by paying the largest interim dividend in its history of 100.2 billion KRW in 2019. At that time, Seo received an interim dividend of 18.2 billion KRW. From 2012 to 2021, Seo Min-jung received a total dividend of 35.2 billion KRW from Innisfree.

Espoir, established in 2015, has recorded operating and net losses every year except 2019. Seo holds 39,788 shares (19.52%).

A financial investment industry insider said, "Seo Min-jung's brand shops need to recover their performance for succession funds and share value to increase, but considering the domestic and international business environment, it will not be easy."

This content was produced with the assistance of AI translation services.