LG Chem cleared to spin off battery business

31-Oct-2020 Intellasia | KoreaTimes | 7:28 AM Print This Post

LG Chem’s bid to spin off its battery unit was approved by its shareholders, paving the way for the company to prevent its debt-financed investments in its electric vehicle (EV) battery business from affecting the company’s petrochemical business, as well as to secure additional capital for further battery sector expansion.

According to the world’s largest EV battery maker, the company’s proposal to separate the company’s battery business division and set up a new company named LG Energy Solution won support from 82.3 percent of participants at a shareholders meeting Friday. A total of 77.5 percent of the company’s entire stake was exercised.

The proposal needed approval from shareholders whose combined investments amounted to at least two-thirds of the total voting stock exercised at the meeting and one-third of the company’s total shares. Having met those requirements, LG Energy Solution will be established December 1, and LG Chem will fully own it as a subsidiary.

During the meeting, LG Chem CEO Shin Hak-cheol said the board decided on the spinoff to “set up the optimised managing system to properly respond to fast-changing market circumstances,” adding that the board also wanted to propel the company even further ahead of its trailing rivals.

LG Chem explained the decision was aimed at tackling two problems the company faces. First, the company said it was “under increasing financial pressure,” as the need for investment continues to grow as it tries to increase battery production capacity at its facilities. Due to this, the company’s net debt has now reached 8 trillion won ($7.1 billion) and its debt to equity ratio has surpassed 100 percent.

The company also said it was facing “limits in resources for investments,” and these have resulted in an investment imbalance between its businesses. If this situation continues, the company anticipates a weakening of competitiveness in many businesses that have growth potential.

LG Chem’s portfolio is comprised of the petrochemical, battery, advanced materials and life science businesses. Of them, petrochemical sales accounted for 47.73 percent of total sales of 7.5 trillion won in the third quarter and batteries accounted for 41.88 percent.

Multiple analysts have warned about LG Chem’s increased capital expenditure following its heavy investment into EV batteries, and this is affecting the company’s financial prudence negatively, though the earnings from batteries will offset them in the future. Citing this, rating houses including Moody’s and S&P have already downgraded LG Chem.

When LG Energy Solution is set up, LG Chem can be free from funding pressure stemming from its battery business and its other businesses can cover their investments on their own. LG Energy Solution will be able to employ various financing methods, including an initial public offering (IPO).

Though LG Chem said “there is nothing confirmed about an IPO,” the company’s individual investors have opposed the spinoff with concerns that the listing will dilute the value of their stakes in LG Chem.

In addition to the individual investors, the National Pension Service, which holds a 10.3 percent stake in LG Chem as the No. 2 stakeholder of the company, also announced that it would oppose the spinoff.

Though the spinoff plan was approved, individual investors are still expressing their dissatisfaction with the decision by dumping their shares. The LG Chem share price closed at 611,000 won on Friday, down 6.14 percent from a day earlier.

“I don’t understand how a plastic bottle maker could have a price-to-earnings ratio of over 100,” a comment on an investors’ forum read. “I bought shares in a battery firm, not a plastic bottle maker.”

During its conference call for the third quarter, LG Chem said LG Energy Solution will achieve over 30 trillion won in sales by 2024. LG Energy Solution seeks to post over 18 trillion won in sales next year.

LG Chem is the world’s largest EV battery maker, with its EV batteries accounting for 24.6 percent of the world’s total battery supply in the first nine months of this year. CATL followed with 23.7 percent, according to market tracker SNE Research.



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