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By Kim Jae-heun
Amid the worsening financial environment, which mainly stem from its aggressive overseas business expansion plans, CJ Group plans to sell its health and beauty drugstore Olive Young, sources directly involved with the issue told The Korea Times, Wednesday.
"CJ Group is talking with investors about unloading Olive Young in an effort to streamline the group's business portfolio. The valuation of the deal isn't known, however, CJ is narrowing differences and conditions with investors before finalizing the deal," one source said asking not to be identified.
From a business standpoint, the sale makes sense, according to industry officials, as group liquidity is rapidly drying up after CJ's controversial decision to jump into the overseas cinema business.
In March 2016, the group's multiplex affiliate CJ CGV spent 301.9 billion won to acquire 38.12 percent of MARS Entertainment in Turkey. MARS Entertainment was Turkey's No.1 investment and distribution business in the film sector that owns five times more screens than the industry's No.2 Avsar. Its entertainment and retail arm CJ ENM invested 100 billion won and the rest was paid by two financial investors; Meritz Securities Co., Ltd and IMM Private Equity.
CJ CGV thought it could make 600 billion won in sales and a 100 billion won profit by 2020 after becoming the largest shareholder of in the multiplex enterprise. However, CJ CGV only earned 114.8 billion won in sales in the first year, far behind its goal of 329.2 billion won.
The affiliate's sales in Turkey stagnated to record only 115.6 billion won by the third quarter of 2018, which came nothing close to its expectation of 487.4 billion won.
The problem began as CJ CGV had signed a total revenue swaps (TRS) deal with its investors. The financial contract obligates the cinema affiliate to guarantee the principal. It must pay the interest to investors on a fixed date resulting in a financial burden if the company fails to meet is sales goal. CJ CGV saw a 51.3 billion won loss in 2017 alone.
Poor performance in box office sales along with the collapse of the Turkish lira due to a political dispute between the U.S. and Turkey have made the situation even worse.
Moreover, CJ CGV's had a poor performance in Vietnam. The Southeast Asian branch made only 1.1 billion won in profits in the third quarter of 2018, a 35 percent drop compared to the same period of the previous year.
CJ CGV was going to list its Vietnamese branch on the local stock market but the business slump led to the plan being abandoned.
A CJ Group official said on the condition of anonymity that the group wants to focus on its main businesses in the future. They are CJ Cheil Jedang, CJ Korea Express and CJ ENM.
It is currently working towards strengthening CJ Cheil Jedang, a food and beverage producer.
Worries of credit downgrade
On a related note, the group recently attempted to acquire Hanwha Group's food company and came "very close" to signing a deal, which was canceled at the last minute.
Sources said the breakdown was mostly because of "severe warnings" from credit ratings agencies as the acquisition would further deteriorate CJ's financial soundness.
"The deal was scrapped as credit ratings agencies warned CJ that the acquisition would have a negative impact on the group's overall credit rating," they added.
Regarding the possible unloading of Olive Young, CJ Group said it has no plans to sell it.
"It is a groundless rumor," a CJ Group official said. "I know why they are saying we are going to sell Olive Young. It is because we merged it with CJ Systems to put it under the IT sector and separated it again earlier this year. But it is still a growing business and an unrivaled firm in the industry, which give us no reason to sell it," a CJ Group official said.
