February 9, 2010 / 6:40 AM / 9 years ago

UPDATE 2-S.Korea's Lotte to buy GS Retail units for $1.2 bln

* Lotte to take over 3 GS dept stores & 14 GS discount stores

* Marks biggest ever deal for Lotte

* GS Retail says to focus on convenience, supermarket sector

* Merrill is Lotte adviser; Barclays advised GS (Recasts with confirmation, adds analysts’ comments)

By Jungyoun Park and Miyoung Kim

SEOUL, Feb 9 (Reuters) - South Korea’s Lotte Group is buying GS Retail’s department and discount store operations for around $1.15 billion as it seeks to catch up with bigger rivals such as Shinsegae (004170.KS) in the country’s growing discount stores business.

The deal marks the biggest ever acquisition by Lotte, South Korea’s top department store operator, and follows the $630 million deal it did for Chinese supermarket operator Times Ltd 1832.HK in October and the $235 million deal to buy convenience store chain ‘Buy The Way’ late last month. [ID:nTOE60O089] [ID:nSEO190501]

There were some questions whether Lotte is overpaying for its latest purchase. Lotte is the country’s top department store operator but lags rivals such as Shinsegae and FamilyMart (8028.T) in the discount and convenience stores businesses.

Lotte has agreed to take over three GS Square department stores and 14 GS Mart discount stores for around 1.34 trillion won ($1.15 billion). These had not been significant earnings contributors to GS Retail, which is focusing on convenience store and supermarket chains.

The acquisition will add to Lotte’s 70 discount stores in Korea but the group would still be ranked as the third-largest, trailing Shinsegae’s E-Mart and UK retailer Tesco’s (TSCO.L) Home Plus.

“This deal is certain to boost Lotte’s discount store business, in that it will be able to narrow the gap with E-Mart and Home Plus,” said Park Gene, a Woori Investment & Securities analyst.

“Lotte is already the No.1 in department store business, and adding three more stores, and properties with it, will further strengthen its market position.”

But some analysts said Lotte was slightly overpaying, compared with the industry’s average valuation of 10-11 times EV/EBITDA.

“Even at 1 trillion won, Lotte is paying 12 times EV/EBITDA but Lotte appears to have considered costs of opening new stores, which make the valuation more reasonable,” said Kim Dong-hee, a Taurus Investment & Securities analyst.

Kim said it normally costs around 200 billion won to open a department store, and about 40 billion won to open the discount store the size of GS Mart.


Bank of America-Merrill Lynch (BAC.N) advised Lotte on the deal while Barclays (BARC.L) advised GS Retail.

A Lotte Group spokesman said the deal may have to be approved by the government because of competition concerns. He did not provide other details of the deal.

Some analysts said Lotte may borrow to fund part of the deal adding it may be able to get good rates due to its strong finances.

For GS Retail, the arm of GS Group that is led by GS Holdings (078930.KS), the deal would help it improve its finances by cutting its debt ratio to around 80 percent from 140 percent and grow its more successful convenience store and supermarket businesses.

“We plan to make aggressive investment in our convenience and supermarket business to reclaim the top position in the sector,” GS Retail said in a statement.

The company plans to open 800 “GS25” convenience stores this year, which will be added to its 4,000-strong stores that generated around 2 trillion won of sales last year, to catch up with the sector leader FamilyMart.

FamilyMart, Japan’s third-largest convenience store, has about 4,400 outlets and accounts for a third of industry-wide sales.

Shares of Lotte Shopping (023530.KS), which operates Lotte Department store and discount chain Lotte Mart, ended up 2.62 percent at 313,500 won, versus the broader market’s .KS11 1.14 percent rise. ($1=1165.7 Won) (Editing by Muralikumar Anantharaman)

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