Lotte Wellfood eyes merger with trading arm; firms indecisives

South Korea’s Lotte Corp. is considering a merger of its confectionery unit Lotte Wellfood Co. and agricultural product trading arm Lotte International Co., which would create a food company surpassing 5 trillion won ($3.6 billion) in annual revenue, banking sources said on Tuesday.  

Lotte Wellfood, listed on the main Kospi, will set up a task force next month to accelerate its merger with Lotte International to save manufacturing costs and boost profitability, according to sources.

Lotte Wellfood said in its regulatory filing on Tuesday that it is reviewing various options related to a merger with Lotte International and details are yet to be confirmed, adding that it will disclose further information when the details are decided or within a month.

The confectionery unit was merged with ice cream and dairy products maker Lotte Food in July 2022. Its revenue nearly doubled to 4.07 trillion won last year from 2.15 trillion won in 2021.

Lotte Wellfood has seen its profitability drop due to increasing agricultural product costs due to the Russia-Ukraine war. The company’s cost-of-sales ratio rose to 72.2% last year from 65.8% in 2022.

“If merged, the new entity will raise productivity and profitability while saving food materials trading costs,” a food industry insider said.

Lotte International imports and sells fresh food such as US and Australian beef and raw materials for butter and margarine. Lotte Corp. and Hotel Lotte Co. hold 44.86% and 32.57% stakes, respectively, in the food trading company.

The food importer posted 14.8 billion won in operating profit and 719.1 billion won in revenue last year. Some 35.2% of the sales were from transactions with Lotte Wellfood.

Lotte Wellfood’s business is divided into four categories: dry food and confectionery; frozen food; edible fats and oils; and processed meat.

The company has seen rising costs and worsening profitability in the edible fats and oils and processed meat divisions. Lotte Wellfood buys most raw materials for its edible fats and oils and processed meat from Lotte International. The processed meat business posted a 23.5 billion won operating loss last year.

Lotte Wellfood logged 100.6 billion won in operating profit for the first half of this year, up 49.8% on-year, according to its regulatory filings on Monday. Its sales fell 0.2% on-year to 2 trillion won during the same period.

“The revenue declined on decreased sales in business-to-business food. The profit improved on increased sales of ice cream during the peak summer season,” Lotte Wellfood said on Aug. 5.

The food maker is likely to post 232.1 billion won in operating profit and 4.16 trillion won in revenue this year, according to analyst forecasts.

Write to Hun-Hyoung Ha and Hae-Ryon Choi at hhh@hankyung.com

Jihyun Kim edited this article.