MBK seeks to exit Korea’s Lotte Card for over $2.5 bn

MBK Partners is in the early stages of talks with telecom operator KT Corp. and other potential bidders to sell its majority stake in South Korea's Lotte Card Co., for which the private equity firm hopes to fetch over 3 trillion won ($2.5 billion), according to people with knowledge of the situation on Thursday.

KT appears to be a frontrunner for the deal, in which MBK plans to divest of its 59.83% stake in the country's fifth-largest card issuer.

"KT is the most aggressive bidder as it needs to shore up BC Card's business and prepare K Bank's IPO," one of the sources told The Korea Economic Daily's capital market news outlet Market Insight. 

BC Card Co., 70% owned by KT, is South Korea's largest payment processing company. K Bank is the country's first internet-only bank, in which BC Card holds a 32% stake as of end-September 2021. 

"KT puts a high value on Lotte Card's multitude of loyal customers associated with Lotte Group's units such as Lotte Department Store and Lotte Mart," said another source familiar with the matter.

But if the negotiations with KT break down, MBK plans to switch to a public auction to invite more bidders and raise the valuation of Lotte Card.

Back in 2019, MBK teamed up with Woori Bank to buy the majority stake in Lotte Card at an enterprise value of 1.8 trillion won from Lotte Group. The consortium beat Hana Financial Group, one of the country's top five banking groups.

Since its acquisition, MBK restructured Lotte Card's business and applied digital technology to its business and operation processes, alongside aggressive marketing efforts.

Lotte Card’s net profit jumped nearly fivefold to its record 241.4 billion won in 2021, compared with 51.7 billion won in 2019. Its total equity value, a yardstick for a credit card firm's valuation, stood at 2.4 trillion won at the end of last year.

The divestment is expected to more than double MBK's investment in the Korean card issuer in three years. 

EXPECTED SYNERGY EFFECTS

For KT Corp., Lotte Card will help KT's two financial arms BC Card and K Bank diversify their businesses and boost valuations.

BC Card relies heavily on fees for payment processing services from banks, which do not have their own credit card payment networks. But its business model is facing limitations as a number of its member banks, including Woori Bank and Jeonbuk Bank, are building their own payment networks.

For its part, K Bank is trying to go public by next year as pledged to its investors last year, when it raised 1.2 trillion won ($1 billion) in a rights offering.

MBK participated in the funding round, injecting $147 million into the online-based lender via its special situations fund, MBK founder and Chairman Michael ByungJu Kim said in a newsletter released this week. 

Lotte controls 9.32% of the domestic credit card market, trailing Shinhan, Samsung, KB Kookmin and Hyundai, each of which boasts a double-digit market share.

Woori and Hana are closely behind Lotte, each with a share between 7% and 9%. 

If Woori or Hana takes over Lotte, it will be able to more than double its market share. For other Korean financial holding groups, acquiring Lotte Card could be the springboard to jump ahead of their rivals in a market without a dominant leader.  

"For Woori Card and Hana Card, if they miss this chance to buy Lotte, they may fall to the bottom of the sector and become the smallest player," said a domestic card industry official.

Woori Bank is the No. 2 shareholder in Lotte Card with a 20% stake. As a co-investor, Woori was granted the right to review a bid to buy the entirety of MBK's shares in Lotte Card ahead of other bidders. Lotte Group has the remaining 20% stake in the credit card unit. 

Last year, MBK achieved double-digit internal rate of return, or billion-dollar returns from three divestments in South Korea, China and Japan. The three companies are Japan's Accordia Next Golf, China's Apex International Corp. and South Korea's Doosan Machine Tools.

At the same time, it invested a combined $1 billion in South Korean assets last year, including the $406.7 million purchase of Korea Center Co., which helps create e-commerce websites for retailers as well as a $343.6 million deal to buy two leading footwear textile manufacturers.

Its remaining Korean portfolio includes supermarket chain Homeplus; outdoor clothing brand NEPA.; home decor company Modern House; and Golfzone County, the country's largest golf course management firm.

In December 2021, it sold its 12.5% stake to the US-based alternative asset manager Dyal Capital Partners for $1.18 billion. MBK hopes the stake sale will expand its pool of both investors and asset managers beyond Asia to the US and Europe.

Write to Jun-Ho Cha and Si-Eun Park at chacha@hankyung.com
Yeonhee Kim edited this article.