South Korea’s Lotte Corporation has opened private negotiations with a potential investor in its wholly-owned subsidiary Lotte Changbai Beverage Co after dropping plans for a competitive auction in a bid to raise additional funds.   

The interested investor has started conducting due diligence on Lotte Changbai Beverage Co’s factories as it decides whether to sign a contract with the company, industry sources said on Wednesday (July 29). 

Lotte Corporation plans to raise money for Lotte Changbai Beverage through a rights offering, with proceeds being used to boost the company’s working capital and expand facilities. Investor will buy new shares issued by Lotte Changbai Beverage,  while some existing shares may also be sold if requested by the potential investor. Deloitte Anjin is managing the deal.

Lotte Changbai Beverage produces mineral water from springs in the Changbai Mountain on China’s border with North Korea (Baekdu in Korean), with some exported to South Korea and the rest distributed in China.

The wholly-owned Lotte subsidiary was set up in China in 2004, initially selling its products through original equipment manufacturing deals, and then acquiring a water bottling company in Jilin in 2011 for about 13 billion won ($10.7 million).

Its bottled brands include Baekdoosan Hanulsaem and Icis, which have shares of less than 1 percent and 13.8% respectively in the crowded South Korean market; Samdasoo (39.8%) was the most popular brand in 2019, and Baeksansoo had 8.8%.

Lotte Corporation declared its intention of taking on Nongshim, South Korea’s leading bottled water company, but things did not unfold as expected due to under-investment. Nongshim, which entered the Chinese market directly, spent 200 billion won on a new 300,000 square meter plant for its Baeksansoo brand in 2014, which was 10 times bigger than Lotte Changbai’s plant.

Market insiders are watching whether Lotte Corporation will be able to successfully raise funds and strengthen its presence in the market.

“When it first entered the Chinese market, Lotte Changbai Beverage was aggressive in marketing its Baekdoosan Hanulsaem brand to boost sales, but the company has experienced financial difficulties due to rising production and logistics costs,” said an industry source.

“Since then, expectations for expanding its bottled water business in China have been low, but the company is attracting  attention on whether it will be able to strengthen its position if it successfully expands its capital.” (Reporting by Ar-rum Rho)