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LG Chem confirmed media reports on Wednesday that it was considering merging with its pharmaceutical and biotechnology affiliate, LG Life Sciences, in a move that analysts said was aimed at diversifying its revenue sources. We are examining various ways to cooperate with LG Life Sciences, including a merger, but nothing has been decided yet at the moment, said LG Chem in a statement. We can only say that we do not consider merging through stock purchase. We will release a detailed plan on the issue within a month. Analysts said that LG Chem would likely swap shares with LG Life Sciences. LG Corp. is the largest shareholder of both LG Chem and LG Life Sciences, controlling a 30% stake in each company. There is no significant shareholding between the two companies. LG Chem has been expanding its portfolio beyond its electric vehicle battery production and petrochemical businesses. In April, the company jumped into the agricultural chemical business, acquiring South Korea''s largest agro-material processor Farm Hannong from Dongbu Group for 515.2 billion won ($472 million). Analysts say that LG Chem wants to dilute its exposure to cyclical industries, as two of its main businesses -- petrochemical and battery -- are sensitive to business cycles. LG Chem appears to be interested in pharmaceutical/biologics products to capture higher margins in a less cyclical industry, said Cindy Park, an analyst at Nomura. The deal is part of the company''s strategy to diversify into energy (battery), bio and water. About 70% of LG Chem''s revenue comes from the petrochemical business and the rest from battery and electronic materials, according to company data. Kwon Young-bae, an analyst at Mirae Asset Securities, says that LG Life Sciences will benefit from the merger and investing more money in developing dermal fillers, diabetes drugs and growth hormones. LG Life Sciences will be able to push for more aggressive R&D with LG Chem''s abundant cash, said Kwon. LG is not alone in betting on the biopharmaceutical industries. Its local rival Samsung Group is also rushing to develop those businesses, believed to be the next growth engine along with the technology and financial sectors. Samsung is strengthening its biopharmaceutical producer Samsung Biologics, investing $730 million in its third plant with a bioreactor capacity of 180,000 liters in Incheon. The company also plans to make an initial public offering in Korea later this year. The market reaction in Seoul, however, was muted on Wednesday. LG Chem closed at 249,500 won, down by 0.8%, while LG Life Sciences finished the day at 66,200 won, declining by 5.6%, underperforming the benchmark KOSPI index which lost just 0.23%. |