North Asian private equity firm MBK Partners plans to streamline its newly acquired credit card business in South Korea to bolster profitability against a tougher industry backdrop, say industry sources.
South Korean chaebol Lotte Corp said on Monday that it had agreed to sell 79.83% of Lotte Card, the country’s fifth largest credit card issuer, for W1.38 trillion ($1.16 billion) to a consortium comprising North Asian private equity firm MBK Partners and Woori Bank.
The sale comes as cuts in credit card merchant fees will significantly lower the industry's profitability.
In November, Korea’s Financial Services Commission announced significant cuts to credit card merchant fees and expansion to the number of merchants eligible for such lower fees. The cuts became effective in January.
Analysts at credit ratings agency Moody’s reckon that the industry will lose fee revenue of about W800 billion as a result of these measures; this is on top of W600 billion in lost revenue from other measures announced since 2017 to lower card merchant fees, such as the lowering of late fees in April last year, and a cap on the maximum interest rate charged in February 2018.
Companies' delinquency ratios will rise from all-time lows because of slowing economic growth and weak consumer sentiment. In addition, disruption from technological advancements will continue to prompt card companies to make sizable related investments, said Moody’s.
Average card fee income fell to 1.8% of transaction volume in 2017, from 2% in 2015, and is likely to decline further this year on the new measures, the ratings agency said.
To combat this trend, MBK Partners plans to focus on Lotte Card’s more profitable credit card loan business, rather than growing its overall market share in financial services, the industry sources said.
Lotte Card has some advantages that make it more resilient than its rivals. It has been promoted within the Lotte Group, the fifth largest conglomerate in the country. Lotte’s network spans a range of retail outlets from department stores, Lotte Duty Free to fast food chain Lotteria.
MBK is confident it can pull this off given its experience in the Korean financial sector. It bought the Korean operations of ING Life Korea in 2013.
MBK also teamed up with local heavyweight Woori Bank, the flagship lender in the financial conglomerate Woori Financial Group. MBK will take 59.83% of the 79.83% stake while Woori Bank has rights to buy 20% of Lotte Card. After the deal completes, Lotte Group and its affiliates will continue to hold 21.7%. Woori Bank owns Woori Card so can bring some industry expertise
to help streamline Lotte Card.
Woori Bank could also buy MBK’s stake in the future. Korea’s major banks are keen to diversify their earnings as their net interest margins on lending are under pressure. A combination of Woori Card and Lotte Card would create the country’s second-largest credit card firm with total assets of W22.6 trillion, giving Woori Bank sizeable heft in the industry. Such a long-term strategy could have given Lotte comfort as it is keen to see the company survive and to continue to provide employment for staff.
HARD-FOUGHT AUCTION
Lotte said it would sell Lotte Card in November as part of its restructuring. This step had been widely expected since the conglomerate had adopted a non-financial holding structure in October 2017 which meant that it was required to unload its financial units within three years to comply with the law.
After a first round of bidding in the auction, Lotte and its advisers made a shortlist of five suitors: Hana Financial Group, Hanwha as well as local private equity firms IMM, Hahn & Company and MBK. Three of the five submitted binding bids, the people said.
Hana Financial Group was particularly keen to acquire Lotte Card as, like Woori Bank, it wanted to diversify its earnings.
Lotte, however, named Hahn & Company as its preferred bidder after it offered W1.87 trillion for 80% of Lotte Card. This was higher than MBK’s bid. The financial sponsor was then given a week to finalise its bid. Hahn & Company did not mandate a financial adviser.
The auction then took a dramatic twist.
The labour union of mobile carrier KT filed a complaint against Hahn & Company in March that it had failed to pay taxes in full on the sale of a marketing firm to KT affiliate Nasmedia in 2016. Prosecutors started to investigate in May which raised alarm bells at Lotte Group.
Lotte Group, which needs to conclude the sale of its card unit by October to meet the country's non-financial holding structure guidelines under the fair trade law, could not take the risk of a lawsuit dragging out the deal process.
Also, if Hahn & Company were found guilty then it would be barred from buying Lotte Card. Korean law states that major shareholders in financial companies cannot have committed a serious offence in the previous five years.
“The complaints KT’s labour union has filed against one of our fund companies are completely groundless and without merit. They contend that an inheritance tax should have been used which is not the case under any tax or commercial laws as inheritance tax is only for those who are related parties,” said Keith Kim, a managing director at Hahn & Company.
Hahn & Co. or Sang-Won Hahn are not in any way a related party of KT or its management. The valuation was supported by an independent accounting firm which is publicly disclosed and the required taxes were paid three years ago, Kim added.
MBK was able to leapfrog into pole position in the auction as it had maintained contact with the sellers, had impressed them by bringing in a strategic buyer as a consortium partner, and had prior experience of navigating the approval process of buying a financial company in Korea when it bought ING Life Korea.
Lotte’s board of directors approved the sale on Friday, marking the largest transaction in Korea involving a controlling stake in a credit card issuer since 2006, according to data provider Dealogic. MBK’s purchase is also the first ever acquisition of a majority stake in a Korean credit card issuer by a financial sponsor, Dealogic added.
Credit Suisse advised MBK while Citigroup advised Lotte.
This article has been updated to add comment from Hahn & Company
