Surprise Jailing of Lotte Chairman Leaves Group in `Crisis'

(Bloomberg) -- The surprise jailing of Lotte Group Chairman Shin Dong-bin on bribery charges has thrown one of South Korea’s biggest chaebols into further disarray. 

Now up in the air: a planned initial public offering for Lotte’s hotel unit; its hope of selling its network of stores in China; a restructuring plan for the group; and the family feud between Shin Dong-bin and his elder brother for control of the conglomerate founded by their 95-year-old father. The company’s operation of a duty-free store at Lotte World Tower in Seoul is also at stake, as the Korea Customs Service said Wednesday it will decide whether to cancel the license needed to operate the store after legal reviews.

“It’s the biggest crisis since the founding of Lotte,” Chung Sun-sup, the head of corporate analysis firm in Seoul. “The growth of Lotte’s business could be stagnant."

Shin Dong-bin was sentenced to 30 months in prison on Tuesday after being found guilty of charges stemming from Lotte’s decision to give 7 billion won ($6.5 million) to a confidante of President Park Geun-hye, allegedly in exchange for government favors in providing a license to operate duty-free stores. Prosecutors had sought a four-year jail term. The chairman appealed the decision to the Seoul High Court on Wednesday, said a Lotte Corp. spokesman, who asked not to be named per company policy.

Shares of Lotte Corp. declined 6 percent in Seoul, the biggest drop since Sept. 25, Wednesday, while the benchmark Kospi index gained 1.1 percent. Lotte Shopping Co. stock fell 2.3 percent.

‘Negative Impact’

“It is tragic, as we now face unexpected situations,” a representative at Lotte’s flagship unit said by text message after the verdict. “We are concerned that this could have a big negative impact ahead of the planned Hotel Lotte IPO, the formation of the holding company, and on investments as well as employment.”

Read more here on the legal review of the Lotte World Tower duty-free license

Lotte officials were so confident that Shin Dong-bin wouldn’t be jailed that they had made arrangements for him to head to the Lotte resort near Pyeongchang where the Winter Olympics are underway. The chairman, who has been head of the Korea Ski Association, was the only top chaebol chief to carry a torch during the Olympic torch relay.

Shin Dong-bin becomes the second head of a top conglomerate to be imprisoned for seeking to curry favor with impeached President Park by bribing one of her confidantes. The de facto head of technology giant Samsung Electronics Co., Jay Y. Lee, was jailed last year in a related trial, but he was unexpectedly released last week on appeal in a ruling that was perceived as a setback to government pledges to curtail the power of the nation’s corporate elite.

The court may have been tougher on Shin than expected because of Lee’s release, with judges “defending themselves after the judiciary faced backlash over the decision to release Jay Y.,” said Park Ju-gun, president at corporate research firm CEOScore in Seoul.

“This certainly turns the tide in terms of public perception” about the efforts of President Moon Jae-in, said Oliver Salmon, lead economist in Singapore with Oxford Economics Ltd. “These high profile convictions are good for public perception that he is taking a firm approach against the chaebol.”

For Lotte, a conglomerate with businesses including chemicals and hotels, the decision comes after a sweeping reorganization last year that created a holding company for many of the groups’ assets and consolidated Shin’s control. The revamp is still underway with plans to list shares of Hotel Lotte and absorb it along with cash cow Lotte Chemical Corp. into the holding company.

In the wake of Shin Dong-bin’s sentencing, Lotte Corp. Co-Chief Executive Officer Hwang Kag-gyu will lead an emergency management committee, Lotte Corp. said in a text message Wednesday. Hwang urged the heads of Lotte affiliates to continue normal operations.

The chairman’s conviction would likely give an edge to elder sibling Shin Dong-joo in a long-simmering dispute: Under Japanese law, the Lotte chairman would now have to step down as head of the company’s Tokyo-based unit Lotte Holdings Co., where the elder Shin owns 33.3 percent of voting rights.

Shin Dong-joo called for the “prompt resignation and dismissal” of his younger brother. In a statement posted on his Japan-based company’s website, the elder sibling also said “fundamental reforms in corporate governance are an indispensable and urgent topic for Lotte group.”

“Lotte’s Korea business is safe from a battle over management control, but there are risks remaining in the Japan business since Shin Dong-bin has to step down,” said Park of CEOScore.

Shin Dong-bin, who turned 63 on Wednesday, was also fined 7 billion won. He can appeal the ruling with the Seoul High Court.

The chairman, who’s been running the retail-to-chemicals giant in that post since 2011, had been seeking to invest billions of dollars to expand overseas. Then, a series of crises struck.

Family Fracas

In 2015, a family fracas spilled into public view as Shin’s older brother led a boardroom coup that failed. After that, Lotte grappled with corruption investigations and intensifying regulatory scrutiny, which took a toll, with Lotte canceling a potential $4.5 billion IPO and withdrawing a bid for chemical-maker Axiall Corp. in 2016. Last year, Lotte was caught in a diplomatic row with China after the company offered its land to the Korean government, which sought to install a controversial U.S. missile defense system opposed by China.

China used to be one of Shin’s biggest priorities as Lotte expanded in the world’s second-largest economy aggressively with investment plans that included developing a 3 trillion won theme-park project in Shenyang and increasing the number of stores in the country. As China-Korea relations soured, most of Lotte’s 112 marts and supermarkets in China were shut down by Chinese authorities for alleged fire-safety violations, and the Shenyang project was halted.

Surprise Jailing of Lotte Chairman Leaves Group in `Crisis'

The group’s efforts to sell the China stores stalled over alleged fire-safety infractions that created uncertainty about whether a new owner could operate them.

“Lotte Shopping has been very open about their intention to sell their Chinese supermarkets, but they weren’t able to find any buyers because of the political tensions between the two countries,” said Catherine Lim, a Bloomberg Intelligence analyst in Singapore. “That’s probably still going to be in limbo. Because of the uncertainty the whole group is facing, simply put, it makes it difficult to execute on a legally binding contract.”

©2018 Bloomberg L.P.

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