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Lotte Chem ready to bid for JSR’s synthetic rubber business

Jan 20, 2021 (Gmt+09:00)

Lotte Chem ready to bid for JSR’s synthetic rubber business

South Korea’s Lotte Chemical Corp. has completed due diligence on the synthetic rubber operation of JSR Corp., put up for sale by the Japanese company, and is ready to make a takeover offer around next month, according to investment banking sources on Jan. 20.

Lotte is one of the Korean chemical companies tapped by JSR to dispose of its elastomer unit, which had racked up 80 billion-90 billion won ($73 million-$82 million) in annual operating profit before COVID-19 struck.

The business segment produces general-purpose synthetic and specialty rubbers such as cathode binders used in rechargeable batteries. The Japanese firm hopes to focus instead on semiconductor materials, bio and life sciences, sources told Market Insight earlier this month.

In response to the report, JSR said last week that it has been considering various ways to reform its business structure, but declined to give further details.

For the possible acquisition, Lotte Chemical hired Nomura Securities as its advisor. An acquisition of JSR’s elastomer unit is expected to help the Korean petrochemical manufacturer expand into high value-add specialty chemical products, while Lotte Group Chairman Shin Dong-bin has emphasized the importance of preparing for the post-COVID-19 era.   

The potential sale is likely to materialize by the end of March, the sources said.

Back in 2019, Lotte made an aborted attempt to buy Hitachi Chemical Co., a rechargeable battery material maker. In May of last year, Lotte purchased a 4.7% stake in Showa Denko, which had beat Lotte to acquire Hitachi Chemical.

EXPECTED SYNERGY

As South Korea’s top ethylene producer, Lotte's main products are basic petrochemical products that tend to be sensitive to business cycles.

JSR’s synthetic rubber products include solution styrene butadiene rubber (SSBR), used in auto tires. The company ranks fifth in the global SSBR market by market share. It also owns original SSBR technologies that are used in eco-friendly tires due to their higher wear resistance and fewer emissions than conventional tires.

JSR runs operations in Japan, Thailand and Hungary with an annual production capacity of 600,000-700,000 tons for synthetic rubber, including 170,000 tons of SSBR.

Purchase of the JSR unit would create synergy with its joint venture launched alongside Italian chemical company Versalis in 2017. Through the JV, Lotte has entered the high-performance SSBR market, producing 100,000 tons annually. But the venture has been suffering from heavy operating losses in the tens of millions of dollars per year. High certification standards required by automakers meant high entry barriers to newcomers. JSR’s elastomer business would help Lotte meet the strict standards required by global tire makers.

Additionally, Lotte Chemical’s core products -- butadiene and styrene monomer -- are used as raw materials of synthetic rubber products.

ESTIMATED PRICE

Considering the annual operating profit of 80 billion-90 billion won at JSR's elastomer business unit, JSR may ask up to 1 trillion won ($907 million) for the sale, the sources estimated.

For Lotte, however, there is no rush to buy the currently loss-making operation. Since last year, Lotte has said various companies would come to the market in the aftermath of the global pandemic and Lotte’s steady cash flow will help it respond actively to market opportunities.

After suffering its worst results in both 2019 and 2020 during market downturns, the synthetic rubber market's oversupply is now showing signs of easing and is set for a turnaround, said Hana Financial Investment analyst Yoon Jae-sung.

“If Lotte Chemical acquires JSR at a lower price, it will achieve two benefits: spreading risk caused by the volatility of raw materials markets and expanding its downstream business,” he said in a report.

JSR’s elastomer business posted 1.8 trillion won in revenue for the fiscal year 2019 that covers the April 2019 to March 2020 period, accounting for the largest portion of 37.9% among its four business divisions. But the elastomer unit ran an operating loss of 18.5 billion won in fiscal 2019, hit by the pandemic-caused auto industry slowdown.

Write to Jun-ho Cha at chacha@hankyung.com

Yeonhee Kim edited this article.

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