LG Electronics Plans $938 Million Rights Offer After Losses; Shares Plunge

By Jun Yang - Nov 3, 2011 6:21 PM GMT+0700

LG Electronics Inc. (066570), reeling from losses at its flat-panel and mobile-phone units, plans to raise 1.06 trillion won ($938 million) in a rights offer to ramp up investment in its handset and other main businesses.

The world’s third-largest maker of mobile phones plans to sell 19 million new shares at 55,900 won apiece, a discount to today’s closing price of 61,600 won, the Seoul-based company said in a statement today. The shares first will be offered to existing holders from Dec. 20 to Dec. 21, and any unsubscribed portion will be sold in a public offering.

The world’s third-largest mobile-phone maker slumped the most in more than three years in Seoul on speculation about the share sale, the first since the company raised 636 billion won in a 2005 offer, according to data compiled by Bloomberg. LG Electronics, whose handset unit has lost money for six straight quarters, said it will use the fund to strengthen its core businesses including smartphones.

“They say it’s for capital expenditure, but it’s unclear how the money will be used,” Chung Yun Sik, the Seoul-based chief investment officer for equities at ING Investment Management Korea Ltd., which oversees about $16 billion. “Without a clear explanation, there won’t likely be an immediate rebound in the stock price.”

LG Shares Tumble

LG Electronics will spend 638.6 billion won for capital expenditure and the remainder will be used for research and development, the company said, without providing further details.

The company tumbled 14 percent at the close of Seoul trading, its biggest daily drop since Oct. 24, 2008.

Affiliates LG Corp. (003550) fell 9.9 percent; LG Innotek Co., a light-emitting diode maker, lost 4.5 percent; and LG Display Co., the world’s second-largest liquid-crystal-display maker, plunged 6.3 percent.

Fitch Ratings on Nov. 1 lowered the outlook on LG Electronics to “negative” from “stable,” saying the company’s operational competitiveness is unlikely to recover in the short term.

Last month, Moody’s cut the outlook for LG’s Baa2 issuer and senior unsecured debt rating to “negative” from “stable.” Standard & Poor’s lowered the long-term corporate credit and senior unsecured debt ratings to BBB- from BBB.

Net Loss

“Maybe they are selling new shares to deal with fund- raising issues after the credit agencies cut their ratings, rather than to develop new phones,” Chun Sung Hoon, a Seoul- based analyst at Hana Daetoo Securities Co., said by telephone.

The share-sale plan was reported previously by Dow Jones and appeared on the Wall Street Journal’s website.

LG Electronics last month posted a net loss of 413.9 billion won for the third quarter after recording a wider-than- estimated loss in the mobile-phone business. LG Display, 38 percent owned by LG Electronics, reported a record 687.5 billion-won loss for the three-month period.

The company lost more than 800 billion won from handset sales over the past year after lagging behind Apple Inc. and Samsung Electronics Co. in introducing smartphones.

LG Electronics’s share in the global mobile-phone market fell to 5.4 percent in the third quarter from 8.3 percent a year ago, research company Strategy Analytics said Oct. 28. LG Electronics’s market share this year may fall to 6.5 percent from 8.6 percent last year, according to the Boston-based researcher.

LG Electronics still has a relatively low debt ratio and shouldn’t have difficulties in obtaining loans, making it hard to rationalize the new share sale plan, said Choi Nam Kon, a Seoul-based analyst at Tong Yang Securities Inc.

LG Electronics’s debt-to-capital ratio increased to 173 percent in the third quarter from 151 percent at the end of 2010, the company said last month after announcing third-quarter earnings.

“If they’re doing this for some premature reasons, they’re just ignoring their shareholders,” Choi said.

To contact the reporter on this story: Jun Yang in Seoul at jyang180@bloomberg.net

To contact the editor responsible for this story: Michael Tighe at mtighe4@bloomberg.net.