LG Group moving to reduce intra-group dealings
LG Twin Towers, LG Group's headquarters on Yeouido, Seoul
By Baek Byung-yeul
LG Group Chairman Koo Kwang-mo
LG Group has been moving to reduce intra-group business transactions under Chairman Koo Kwang-mo as Korea's fourth-largest conglomerate rushes to unload units that are heavily dependent on other affiliates for business.
The move is in response to the liberal Moon Jae-in administration's campaign to tighten rules preventing chaebol from excessively outsourcing contracts or assigning work to subsidiaries and affiliates.
An industry official said Monday LG Corp., a holding company of the group, has been in negotiation with Hong Kong-based private equity fund (PEF) firm Affinity Equity Partners to sell the maintenance, repair and operations (MRO) business of its subsidiary Serveone.
Inter-subsidiary deals have been criticized for allowing conglomerates to continue to grow while hurting small suppliers.
In response, the Fair Trade Commission (FTC) toughened the rule as the antitrust regulator proposed the revision of the fair trade rule in August. FTC Chairman Kim Sang-jo has said owner families of the country's large business groups should sell their stakes in non-core affiliates, which have relied on inter-subsidiary deals.
Under the new law, the FTC will be able to restrict intra-group deals of both listed and unlisted companies in which the owner family owns more than a 20 percent stake regardless of whether the companies are listed or not. Previously, the FTC kept curbed chaebol that owned stakes larger than 30 percent in listed or 20 percent in unlisted companies.
Serveone, an unlisted LG Group affiliate, will have a chance to become subject to the FTC investigation. LG Corp. currently owns a 100 percent stake in Serveone and LG Corp. Chairman Koo Kwang-mo has a 14.99 percent stake in LG Corp.
To comply with the FTC's regulations, LG Group already announced that the owner family members plan to sell their entire stake in Pantos, a logistics arm of LG Group, to Mirae Asset Daewoo Private Equity in October.
An LG Group official said the decision is a pre-emptive effort before the FTC takes action against conglomerates.
“LG Group has been in talks with Affinity Equity Partners to sell the management rights of MRO business of Serveone as the PEF firm was chosen as a preferred bidder,” said the industry official. Serveone announced it will spin off its MRO business into a separate company on Oct. 31 and once the spinoff is completed on Dec. 1, the MRO business will form a new business entity.
LG Group and Affinity are seeking to sign a stock purchase agreement under which the latter will purchase a 50 percent to 70 percent stake for about 700 billion won ($620 million) to 1 trillion won ($886 million).
If the two sides fail to make an agreement by the end of 2018, LG may begin negotiations with the second preferred bidder MBK Partners, a local PEF firm.
The affiliate made 6.89 trillion won in sales and 210 billion won in operating profit in 2017. Serveone earned nearly 80 percent of its sales from intra-group dealings in 2017.
After LG Group completes sales process of the MRO business of Serveone, LG Group has only one affiliate LG CNS, an IT service arm of LG Group, that may face FTC scrutiny as LG Corp. holds a 85 percent stake in LG CNS.