LG looks to shore up its resources and energy ventures with the acquisition of Pantos

LG International has acquired a 51% stake in Pantos Logistics after LG purchased 1.02m shares at a price of KRW314.7bn ($291.7m). The acquisition is not altogether surprising and has been rumoured for some time. LG’s principal motive appears to be supporting its resources and energy businesses which have suffered from low wholesale prices in recent years.

Prior to the acquisition the two companies had developed a close working relationship over many years based on the relationship between the brothers Koo Jung-hwoi, the founder of Pantos, and Koo In-hwoi the founder LG International. In accordance with the Chaebol business structure prevalent within South Korea’s largest companies the majority owners of Pantos Logistics were, until the acquisition, Cho Won-hee (50.9%) and Koo Bon-ho (46.1%); the daughter-in-law and grandson of Koo In-hwoi. In addition, the current CEO and CFO of Pantos Logistics are both ex-LG employees, having held senior positions within the company prior to the initiation of their current roles.

In Pantos’ early years this relationship was crucial with LG supporting the company’s growth by outsourcing its warehousing, shipping and handling operations. Consequently LG is said to account for over 60% of Pantos’ volumes, making the two companies somewhat reliant upon each other.

For many years Pantos Logistics has been looking to diversify the source of its volumes through growth beyond its largest customer but with only limited success. With such an enduring and close relationship it was perhaps inevitable that LG would want to assert more control over its principal logistics provider, especially considering the struggle of its logistics intensive resources and energy business.

In fact in a statement LG said that it, “Expects to gain synergies such as the boosting of the logistical function in its resources and industrial-materials trading business, its logistical-function use, and its exploration of new business opportunities.”

LG will operate Pantos as a subsidiary and will look to develop its capabilities outside of containerized freight with more emphasis on bulk logistics and a new focus on resources and materials. Presumably LG is making this change in the hope that it will be able to lower its own logistics costs in those sectors.

LG also intends to diversify the geographic spread of Pantos beyond its traditional heartland in Asia Pacific. An LG official explained, “We plan to combine LG’s global capacity and Pantos’s logistics capacity to boost our business competitiveness and corporate value.”

The acquisition is likely to lead to heavy investment in Pantos to develop its operational capabilities in bulk logistics and around the world. Investment of this sort in such a large player will significantly increase competition in the bulk logistics market, though Pantos’ volumes are likely to come primarily from LG itself to begin with.

The acquisition of Pantos will help to provide a larger stable base of income for the company as it looks to mitigate the impact of low coal prices. Equally developing Pantos’ bulk capabilities will help LG to shore up its struggling energy business by lowering logistics costs and should ensure Pantos’ growth in the foreseeable future. For both LG and Pantos the deal would seem to be a long term fit.