LCI ends deal with LOTCHEM – What went wrong?

In an announcement sent to the PSX on 12/01/2024, Lucky Core Industries (LCI) announced that it was ending its share purchase agreement with Lotte Chemical Pakistan (LOTCHEM). The share purchase agreement now stands cancelled. The original agreement was for the acquisition of 1,135,860,105 shares of LOTCHEM, amounting to approximately 75.01% of the company’s issued capital.

This wasn’t the first time a company tried to acquire LOTCHEM. In July 2022, Novatex had also announced the acquisition of 75.01% stake in LOTCHEM. 6 months later, they withdrew their offer as they couldn’t reach an agreement on the terms of the transaction.

Why LCI ended the LOTCHEM deal?

In their corporate briefing in August 2022, LCI had already mentioned that it was finding it hard to send the money required for this transaction from Pakistan to Korea. The country is facing a foreign currency crisis and that could well be the main reason why LCI did not want to drag it out long.

The management was hopeful they would find a way but were clear on the fact that the current economic state of the country is a big challenge for the deal.

On the bright side, LCI can now put the cash to use and focus on its existing business.

Why is Lotte Korea selling Lotte Chemical Pakistan?

Lotte Korea’s decision to sell Lotte Pakistan is driven by its strategic initiative to optimize global business operations.

The sale of Lotte Pakistan aligns with the chemical giant’s goal to streamline its operations. LOTCHEM produces purified terephthalic acid (PTA), a crucial component in the manufacturing of Polyethylene terephthalate (PET) bottles and various polymer products,

In 2020, Lotte Korea closed its domestic PTA production line in Ulsan, South Korea, as part of a commitment to ecological responsibility. By divesting the Pakistani unit, Lotte Korea will no longer be involved in PTA production

The proceeds from the sale will strengthen the other business objectives of the Korean company.

What now for LOTCHEM?

After the termination of the share purchase agreement with LCI, LOTCHEM stock closed at Rs. 25.06, down 7.49%(lower lock) for the day.

It remains to be seen how the share price will respond to the announcement next week. Those with open positions on the stock have learned the hard way that buyout arbitrage is not worth the risk.