The Korea Times will run a series of analyses profiling listed corporations to help readers make informed investment decisions. — ED.
By Kim Da-ye
Two tumultuous years have passed in the aftermath of the 2005 acquisition of Jinro by HITE Holdings, a holding company of HITE Brewery and the soju maker. The clouds cast quite a shadow yet and won’t dissipate any time soon, analysts say.
Hite’s troubles stem largely from two sources: poor financial health and the not-so-bright prospects of the beer and soju market.
At the core of the suffering balance sheet is the acquisition of Jinro by the HITE brewery consortium in 2005. Unable to finance the 3.43 trillion won deal alone, it borrowed from financial investors under “put” option deals.
The deal requires the company to pay investors about 1 trillion won, if Jinro is not listed on the bourse by Sept. 28, 2010, according to Hyundai Securities’s latest report on the liquor market. The contract also requires the liquor giant to pay the difference, if the initial offering price does not match the guaranteed return on the investment.
Jinro succeeded in getting listed on the stock market in October 2009. But the 41,000 won initial offering price was about 20,000 won short of the guaranteed return. The firm ended up owing a difference of 274 billion won to the Korea Teachers’ Credit Union and Military Mutual Aid Association.
It hurt HITE Holding’s debt ratio ― liabilities divided by equities ― by rising from 53 percent to 92 percent.
The “put option curse” did not end there. The National Credit Union Federation of Korea (NCUFOK) and Real DW, which invested in Jinro, were able to sell back their shares in April this year. NCUFOK did so, receiving 59.3 billion won from HITE Holdings for 1.1 million shares. The holding firm’s debt ratio increased again from 92 to 94 percent.
But the real test came when Real DW, which invested over 230 billion won for 4.41 million shares, didn’t exercise its put option. HITE Holdings was then required to buy back the shares at the per-share price of about 55,100. The stock price as of July 19 ― the deadline date ― was 37,600 won, forcing Hite to pay an extra 17,500 won.
Buying back the shares could have resulting in drying up the cash flow for HITE Holdings, but the parties made a last-minute agreement that Real DW would extend the option deadline by 2 years and 9 months until April 2013. The creditor instead was guaranteed a better rate of return ― 6.48 percent up from 5.45 percent.
Though the liquor firm earned itself some time, uncertainty over Jinro’s stock price lingers.
“There is a considerably close relationship between the group’s stock price and the financial investors’ put options. Because of the concerns over the option deadline in May 2009, the stock price of HITE Brewery started dropping from the end of 2008, and the growth of the stock price is still limited,” wrote Yoo Jin and Choi Kyung-hee of Hyundai Securities who prepared an extensive report about the prospect of the liquor market.
An increase in the stock prices of Jinro and other subsidiaries of HITE Holdings, therefore, is crucial for the holding company to free itself from the vicious cycle. Stock prices are likely to be influenced by performance, but Hyundai Securities’ analysts say that Jinro faces fierce competition from inside and outside the soju market. From inside, Lotte Soju challenges Jinro’s dominance with aggressive marketing and an extensive retail network.
“Jinro’s 2010 market share is likely to decline because Lotte Soju’s aggressive marketing which led to a drop in Jinro’s market share in the metropolitan area. And Lotte Group acquired the convenience store chain “Buy the Way,” which will strengthen the group’s retail network,” wrote Lee and Choi. Jinro has maintained a 50 percent market share for a long time, but it dropped below that line last year.
The increasing popularity of makgeoli is another threat to Jinro. Consumers want a healthier life style, preferring weaker alcohol drinks, and female drinkers whose number has increased tend to avoid soju. Rubbing salt on the wound, the government is making efforts to make makgeoli a national brand item overlooking the fact that soju has long been the preferred choice of many Koreans when drinking alcohol.
HITE Brewery won’t fare much better in the beer market as makgeoli is eating into their share in that arena too. Oriental Brewery (OB) with its Cass lineup has become more popular, and Lotte Group announced it will also break into the beer market.
Daewoo Securities foresaw in a June report a good future for HITE Brewery as the price of malt, a raw material for beer, decreased 22 percent from $497 per ton in the first quarter of 2010 to $387 in the second quarter. The report came before a recent rise in commodity prices.
Daishin Securities also raised the target stock price of Jinro from 39,800 won as of Aug. 10 to 42,000 won.
Hyundai Securities analysts say that selling a part of its 57.4 percent share in Jinro is an option to bring down the debt ratio. Selling a 7.4 percent of Jinro would generate 123 million won, according to the analysts, helping drop the debt from 791 billion won to 668 billion won. Such a move would save 7.4 billion won in interest payments.
A HITE Holding official said that since the firm has earned some time by extending the option deadline, it is considering various options to improve the stock price of Jinro, but has no specific plans. “We will first look at the change in the Jinro stock price. And then we will make decisions,” the official said.