Lotte Revives Hotel IPO as Group Seeks to Regain Confidence

(Bloomberg) -- Lotte Group revived plans for an initial public offering of its hotel unit, kicking off what would be a key part of a effort to improve the image of a South Korean business empire roiled by corruption allegations and feuding founding-family members.

The subsidiary, Hotel Lotte Co., will seek to list its shares, Group Chairman Shin Dong-bin said at a press briefing in Seoul, without specifying a timeframe. In June, Korea’s biggest operator of hotels and duty-free stores shelved plans for a potential $4.5 billion IPO after criminal investigations paralyzed one of the country’s busiest dealmakers. 

Proceeds from the deal could help Lotte step toward unwinding its convoluted ownership structure, something that shareholder activists have long complained about for enabling founding families to govern their enterprises opaquely. Even in a country where dynasties are notorious for their use of cross shareholdings to control vast business empires, Lotte stands out for being the worst offender by that measure.

Aside from the hotel unit’s IPO, Lotte also said:

• The group plans to spend 40 trillion won ($35 billion) over the next five years on mergers & acquisitions, capital and research & development
  
• The group aims to list shares of other affiliates: Korea Seven, Lotte Data Communications and Lotteria
  
• The group has long-term plans to reorganize itself into a holding company structure
  
  

The retail-to-chemicals giant has reason to be pushing a charm offensive now. On Oct. 19, South Korean prosecutors announced indictments against five founding family members, including charges of embezzlement and breach of fiduciary duty against its chairman, after concluding one of their biggest corruption probes ever. The group has said that most of the allegations against Shin aren’t directly linked to him as they involved events that occurred when his father was running the group.

Though Shin is now in position to be the most prominent Korean businessman to face trial since SK Group Chairman Chey Tae-won was jailed in 2013 for embezzlement, Tuesday’s announcement adds weight to the idea that Lotte will move ahead with pledges to become more transparent and gain the public’s trust.

In August 2015, Shin bowed at a press conference to apologize for a family feud. The dispute erupted into public view after he faced a leadership challenge from his older brother in Japan, where some of the group’s key units are based. The failed boardroom coup also resulted in their father -- Lotte’s ailing founder -- getting sidelined to a ceremonial role after he sided with his eldest son.

The stakes are high as Lotte Group, whose businesses range from tourism to department stores and chemicals, generates more than 100 trillion in annual revenue. It’s the fifth largest of the nation’s family-run conglomerates, known locally as the chaebol, which dominate Korea’s business landscape.

After the family feud emerged, Lotte’s woes continued as it faced intensifying scrutiny from regulators and investigators. The serial crises took a toll on the group’s business as it scrapped the hotel IPO and withdrew a bid for chemicals-maker Axiall Corp. Prior to its deals freeze, Lotte was the most active Korean conglomerate in terms of mergers and acquisitions over past six years, according to corporate watchdog CEOSCORE.

One reason Lotte has been under fire is because of its cross shareholdings, which allows family members to exert a disproportionately high level of influence over their groups relative to the number of shares they own. Even though Lotte has scaled back the practice, it had 67 cross shareholdings as of April -- the most among any major chaebol -- according to Korea’s Fair Trade Commission. The government introduced a law in 2014 to curb cross shareholdings.

While Lotte gave no timetable for the hotel IPO, it may take at least a year and a half for the process to begin, according to Chung Sun-sup, CEO of Chaebul.com, a website that tracks Korean conglomerates. Lotte may not be able to file for the IPO until the court case is resolved, he said, noting the possibility of the case reaching South Korea’s Supreme Court.

In Tuesday’s press briefing, Shin said Lotte would seek an IPO as soon as possible. In a separate statement, Lotte said it would discuss the court trial and details of the prosecutors’ indictments with regulators and potential IPO arrangers.

To contact the reporter on this story: Sohee Kim in Seoul at skim847@bloomberg.net. To contact the editors responsible for this story: Peter Pae at ppae1@bloomberg.net, Young-Sam Cho at ycho2@bloomberg.net, Chua Kong Ho at kchua6@bloomberg.net.