LG Chem Vice Chairman Shin Hak-cheol (LG Chem)
LG Chem said Thursday it had approved the split-off of its globally leading battery business to establish a wholly owned battery subsidiary and shore up investments through a public listing in the future.
In a board meeting convened Thursday, LG Chem decided to split off the battery business division on Dec. 1 and form LG Energy Solution, which will manufacture electric vehicle batteries, small-sized batteries and energy storage systems. LG Chem has been running four businesses separately: Petrochemicals, batteries, advanced materials and life sciences.
“We have decided this is the right time to proceed the split-off, as the battery industry is growing rapidly and the EV battery business is beginning to yield profits structurally,” an LG Chem official said.
LG Chem aims to foster the new subsidiary as the world’s leading energy solutions company that not only manufactures and sells battery materials, cells and packs but also provides E-Platform services that encompass the life cycle of batteries including battery care, lease, charging and reuse services. LG Chem’s target revenue for the subsidiary is more than 30 trillion won ($25.5 billion) by 2024.
Until now, LG Chem has delivered investments for the battery business from the petrochemicals business -- a cash cow that accounted for about half of the company’s revenue in the first half of this year. However, in contrast to the petrochemicals business that has stagnated recently, the battery business has seen rapid growth, requiring more funds for expansion and research and development.
The split-off will allow LG Chem to raise required funds by creating the battery subsidiary first and selling some of its 100 percent stake in the subsidiary later.
“The EV battery business has entered a high-growth phase, growing more than 40 percent every year. To keep up with the pace and to maintain its No. 1 market share, (LG Chem) needs to invest 3 trillion won annually,” NH Investment & Securities analyst Hwang Yoo-shik said.
The spinoff comes at a time when LG Chem’s battery business division has proven its profitability.
In the second quarter, LG Chem posted all-time high earnings, turning profit particularly in the EV battery business while local competitors Samsung SDI and SK Innovation lagged amid factory shutdowns of automaker clients in Europe and China. LG Chem’s order backlog for batteries is currently valued at more than 150 trillion won, with its customers including Tesla, Volkswagen, General Motors, Volvo, Audi, Daimler, Renault, Chrysler and Ford.
Meanwhile, experts waved off concerns that separating the battery business division could devalue LG Chem.
“The split-off won’t change anything, because the new battery subsidiary’s performance will still be included on LG Chem’s balance sheet. Considering that LG Chem will be able to deliver a new flow of funds through the initial public offering of the subsidiary, it is a positive factor. The split-off typically takes two to three months, and the IPO will take place afterward, if LG Chem decides to do so,” Daishin Securities analyst Han Sang-won said.
However, the split-off has triggered resistance from retail investors.
On Wednesday, when news first broke out regarding LG Chem’s possible split-off of its battery business, a public petition was posted on the Blue House website, calling for the government to stop the move and criticizing LG Chem for failing to reflect the opinions of retail investors, who invested in the company out of high hopes for its battery business.
“Most of the retail investors purchased LG Chem’s stocks because they believed they were investing in battery stocks. If LG Chem proceeds with the split-off, it would be investing in chemical stocks, which is not the reason why they made investments in the first place,” the petitioner said.
LG Chem’s stock price on Wednesday dipped 5.37 percent from a day prior, closing at 687,000 won. As of 1:45 p.m. on Thursday, the price further plunged 5.97 percent to 645,000 won.
The split is also expected to pose a hiccup for LG‘s joint venture strategy.
Under the Fair Trade Law in Korea, when a second-tier subsidiary establishes a new subsidiary, it must own a 100 percent stake in that subsidiary. In other words, if LG Energy Solution wishes to set up a joint venture with an automaker in the future to build a factory together and split profits, the law could act as a regulatory hurdle.
Last year, LG Chem partnered with Chinese automaker Geely and American automaker General Motors to set up 50:50 joint ventures to build EV battery factories. Since last year, LG Chem has pursued such a joint strategy aggressively, to help the company target local markets and consolidate partnerships with automakers amid intensifying competition in the EV battery industry.
“LG Chem’s battery business division accounts for approximately 38 trillion won out of LG Chem’s market capitalization of 48 trillion won,” analyst Han said.
By Kim Byung-wo(firstname.lastname@example.org)