[PE Now] Where Is Indecisive Lotte Rental Headed?

Lotte Group Considers Resale Option
Hyundai Motor, MBK Among Potential Buyers

The sale of Lotte Rental is currently stalled. After the Korea Fair Trade Commission rejected the merger between SK Rent-a-Car, owned by private equity fund (PEF) manager Affinity Equity Partners, and Lotte Rental, various scenarios have been discussed without a clear solution. Ultimately, it appears that Lotte Group is putting Lotte Rental back on the market. However, Lotte is unlikely to receive its desired price from potential buyers, while Affinity now faces the challenge of restoring the value of SK Rent-a-Car.

According to the investment banking (IB) industry on April 20, Affinity abandoned its appeal of the Fair Trade Commission's decision to block the merger and has instead been negotiating with Lotte Group over the acquisition of Lotte Rental, including potential price reductions. During this process, Affinity explored multiple options to acquire Lotte Rental, including putting SK Rent-a-Car, which it acquired in 2024, up for sale. However, it is reported that Lotte Group began reaching out to potential buyers to restart the sale process. Candidates include Texas Pacific Group (TPG), which participated in the bidding for KT Rental (the predecessor of Lotte Rental), and MBK Partners, which also bid in 2024. Additionally, Hyundai Motor Company, which recently added car rental services to its business purpose in its articles of incorporation, is being mentioned as a possible contender.

'Liquidity Risks' for Lotte Rental’s Major Shareholders... Difficult to Get a Fair Price

Should Lotte Group proceed with another sale of Lotte Rental, it is expected to be difficult to receive a higher offer than Affinity's previous bid. This is because Affinity had offered a management control premium despite Lotte Rental's liquidity risks. Affinity was planning to acquire a 56.2% stake in Lotte Group, calculated at a corporate value of 2.8 trillion won, which is more than half of the total shares. At the time, this valued the company at more than double its market capitalization of 1.2217 trillion won.

Lotte views the sale of Lotte Rental as essential to secure liquidity for its affiliates. This is due to increasing liquidity pressures on Hotel Lotte (holding a 38.14% stake) and Busan Lotte Hotel (23.04%), which together own the majority of Lotte Rental. Hotel Lotte is currently under pressure to repay debt due within one year. As of the end of last year, it had current liabilities of 5.4466 trillion won, while current assets that could be immediately liquidated amounted to only about 2.5072 trillion won, less than half of that. Specifically, among the current liabilities, borrowings (3.5228 trillion won) and bonds (747.8 billion won) total more than 4 trillion won, but cash and cash equivalents on hand amount to just 488.8 billion won.

The situation at Busan Lotte Hotel is even more serious. Its current liabilities are 347.1 billion won, while current assets are just 58.7 billion won, resulting in a current ratio of only 17%. The company holds only 7.5 billion won in cash. Additionally, last year it recorded an operating profit of 2.3 billion won, but its interest payments amounted to 14 billion won, meaning it cannot even cover its interest payments with operating income. Anticipating the sale of its Lotte Rental stake, Busan Lotte Hotel has preemptively classified this asset as a ‘non-current asset held for sale.’ This amount, set at 350.1 billion won, is enough to cover its current liabilities in one go. For potential buyers negotiating with Lotte, the failed previous deal and ongoing liquidity risks are likely to lead to lower bidding prices.

Affinity’s Bolt-On Strategy Fails... Must Overcome ‘Eating Into Own Flesh’ Dividend Payouts

Affinity, which had aggressively bid for Lotte Rental in hopes of creating synergy, must now focus on restoring the value of SK Rent-a-Car after failing to acquire Lotte Rental. However, its financial situation is far from favorable. As of last year, SK Rent-a-Car’s interest coverage ratio, which indicates whether operating profit can cover interest expenses, was about 1.47 times. In comparison, Lotte Rental’s was 1.94 times. Generally, a ratio above 1.5 is considered a sign of sound financial health, which means SK Rent-a-Car spends more of its operating profit on interest payments than its peers. Excessive debt is also a problem. SK Rent-a-Car’s debt ratio (total liabilities divided by total equity) was 574.7% on a consolidated basis and 572.7% on a standalone basis. For Lotte Rental, the ratio is 383.9%. The car rental business requires massive capital investments to secure vehicles, leading to high reliance on borrowings and, consequently, higher debt ratios compared to other industries. However, SK Rent-a-Car’s debt is considered excessive even compared to Lotte Rental, the industry leader.

Affinity must also contend with the fact that many of its assets are already pledged as collateral, and a large portion of its borrowings are subject to floating interest rates. As of last year, SK Rent-a-Car’s tangible assets available for collateralized borrowing totaled 3.0334 trillion won. Of this, tangible assets already pledged as collateral (land, buildings, vehicles) amounted to about 302.7 billion won. Unencumbered tangible assets stand at 2.7307 trillion won, but most of this is rental vehicles (2.6769 trillion won), which are assigned a lower collateral value compared to real estate. Of the total real estate (land and buildings) valued at 221.3 billion won, 176.5 billion won is already pledged as collateral. The Cheonan Auto Arena (used car auction center), considered a core asset, was acquired last year for 102 billion won and is reportedly already pledged as collateral by banks. Amid these challenges, Affinity has partially recouped its investment through dividends. The SK Rent-a-Car board approved an interim dividend of 30 billion won in July last year, followed by an additional 120 billion won in February this year.

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