Lotte Shopping and Hi-mart on Thursday made their merger official by launching their new name, “Lotte Hi-mart,” an entity both parties hope will help take them to the top in the electronics and retail industries.

Experts said the acquisition by Lotte Shopping is expected to bring forth a positive synergy effect, despite Moody’s credit rating agency slashing its rating on Lotte, citing likely deterioration in the company’s financial profile.

“For now, the M&A is no doubt weighing on Lotte’s financial profile, which is what Moody’s seemed to be concerned about. After all, Lotte Shopping has spent over a trillion won on the acquisition,” said Park Jong-ryeol, an analyst for HMC Securities. 

He added, however, that in the long run, the marriage of the two companies is likely to work for the advantage of both parties: “A positive synergy is expected.”

Moody’s voiced a similar view, saying that “the synergies from consolidating Hi-mart could be significant over the longer term, if Lotte Shopping can considerably improve the profitability of its in-house electronics retail operations by fully taking advantage of Hi-mart’s strong sourcing capabilities,” although it added that even so, “the financial impact of the acquisition would more than offset such benefit over the medium term.”

Moody’s Investors Service on Thursday said it lowered its rating on Lotte Shopping and its subsidiary Lotte Shopping Business Management to Baa1 from A3, while issuing a “negative” outlook on them.

“The rating action is in response to the completion of Lotte Shopping’s acquisition of a 65.25 percent stake in Hi-mart Co Ltd, and reflects an expected deterioration in its financial profile, given that the acquisition cost of around 1.2 trillion won ($1.09 billion) will largely be debt-funded,” says Chris Park, a Moody’s vice President and senior credit officer.

On Wednesday, Hi-mart had held a stockholders’ meeting to pass a vote on the name change. The move came after the Fair Trade Commission gave a green light to Lotte Shopping to acquire a 65.25 percent stake in Hi-mart for 1.24 trillion won.

The merger was seen as a step up for Lotte, which currently has a single-digit share in the digital and electronics goods market.

As the industry leader, Hi-mart has a 35 percent stake of the market, which Lotte hopes to capitalize on.

Toward this end, Lotte Shopping officials said the company plans on selling electronics goods under the Lotte Hi-mart name through diverse retail conduits including former Hi-mart stores and the shops being operated at department stores and conglomerate-affiliated retail giants.

Overseas ventures ― mainly in Southeast Asian economies such as Indonesia ― are another business goal Lotte Shopping hopes to reach by merging with Hi-mart.

“One of our first big challenges will be capitalizing on Lotte’s global network to give Lotte Hi-mart the push its needs to get into the global markets,” said Noh Byeong-yong, head of Lotte Mart who was elected on Wednesday as the head of the merged company’s board of directors.

Lotte Mart is operated by Lotte Shopping.

“Vietnam and Indonesia seem to us to be the ideal places to start, since in countries like China, homegrown firms have the stronghold,” Noh said.

Under a so-called “shop-in-shop” scheme, Lotte Shopping is expected to woo international customers to Lotte Hi-mart stores by opening them inside existing Lotte stores abroad.

Han Byeong-hee, 54, who was elected president of the newly merged company said Hi-mart employees had high hopes for business now that they have become a part of a major retailer. “We hope to bring the synergy effect that we all are waiting for,” he said on Thursday.

Han formerly headed Hi-mart’s marketing operations.

Meanwhile, experts said it’s unlikely for the retailer to incur further costs, as both Lotte and Hi-mart are in a similar line of business. They added that retail is not an area that requires hefty investment for maintenance or operating expenses.

“The 1.24 trillion won is the biggest chunk they had to spend on the deal. Further expenses of anything this size are unlikely,” Park of HMC said.

Promotional costs, however, will be incurred, industry watchers said, as Lotte and Hi-mart will need to approach customers with their new corporate identity.
By Kim Ji-hyun (jemmie@heraldcorp.com)