HONG KONG (Reuters Breakingviews) - Corporate carve-ups generally provide a spark. LG Chem’s decision to spin off its batteries business has not electrified investors so far, however. Although some hesitation is warranted, the division’s true value is lost inside a $40 billion chemicals producer.
The South Korean conglomerate picked a good time for a split. Enthusiasm for electric vehicles is growing, powering manufacturers’ stock prices. LG Chem lays claim to the biggest worldwide market share for their batteries, supplying Tesla, General Motors and others. And yet rivals seem to attract higher valuations.
LG Chem shares have been on a tear, more than doubling since the start of the year. Some of that is attributable to what is now provisionally dubbed LG Energy Solutions, which also will house energy storage and small batteries. LG Chem projects sales for the group will more than double by 2024, to some 30 trillion won ($25.7 billion).
For now, the bigger top line belongs to plastics. Using Nomura’s divisional estimates for 2021 EBITDA and multiples of comparable companies chosen by Breakingviews, the big petrochemicals division, along with smaller units that make products used in smartphones and develop drugs are worth almost $17 billion combined. LG Chem’s roughly $46 billion enterprise value therefore implies batteries are pegged at more than $29 billion.
On a standalone basis, things might look different. Blended estimates from Nomura and Mirae Asset Daewoo suggests LG Chem’s batteries will generate nearly $2 billion of EBITDA in the coming year. Valuations for CATL, China’s BYD and Samsung SDI average out at about 23 times. On that multiple, LG Energy Solutions would be worth north of $46 billion, 56% more than what is imputed today.
There are understandable explanations for the muted market reaction to LG Chem’s mid-September separation announcement. For one thing, there will be some dilution if the parent’s ownership stake in batteries drops to 70-80%. Some shareholders also might dump LG Chem in favour of LG Energy. Moreover, an initial public offering is probably at least a year away. And Tesla’s recently divulged battery plans could squeeze suppliers. Even with all that factored in, though, it’s reasonable to expect a spark for LG Chem.
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