IPO Shelved, Lotte Talks Up Duty-Free Business as Probes Widen

  • Hotel unit seeks to move past IPO to focus on top business
  • Criminal investigations push Lotte deeper into turmoil

Lotte Group, South Korea’s fifth-largest family-run conglomerate, is under growing pressure to bolster its duty-free shopping business after shelving one of the year’s biggest initial public offerings in the midst of a deepening crisis.

Hotel Lotte Co., one of the group’s main units, singled out the importance of its duty-free expansion on Monday after scrapping an IPO worth as much as $4.5 billion. The renewed focus on the business, which accounted for almost 90 percent of the hotel unit’s profits last year, highlights Lotte’s limited options as probes into the company widen. 

The lost IPO is the latest blow to the conglomerate, which has 89 Korean units with more than 100 trillion won ($85 billion) in assets. The group also abandoned plans to buy polyethylene maker Axiall Corp. on Friday, hours after prosecutors raided Lotte’s headquarters in Seoul. Even the duty-free business faces hurdles, including the loss last year of a permit to sell tax-free products at the 123-story Lotte World Tower in Jamsil, a neighborhood of Seoul. The firm aims to regain the license as soon as this year.

"For the next six months to a year, it will be very difficult for management to really focus on expanding their businesses because much of their attention will be on the investigations,” said Lim Young Joo, an analyst at Heungkuk Securities Co. in Seoul. “There had been expectations in the market that Lotte may be able to reopen its duty free outlet in Jamsil, but the probes could make that outcome more uncertain."

Family Feud

All of Lotte’s eight listed units fell in Seoul on Monday, losing a combined 1.1 trillion won in market value.

The setbacks began about a year ago, when group Chairman Shin Dong Bin faced a coup attempt by his older brother and their father. The plan backfired as the father, who founded the group and was then chairman, got sidelined to an honorary position and the eldest son was stripped of group positions. The older brother then attempted multiple challenges to Shin Dong Bin’s authority, to little avail.

Since the family feud erupted into public view, the conglomerate has faced a series of scandals. Last month, the Korean government banned Lotte Shopping Co.’s home-shopping channel from broadcasting during prime-time hours for six months after the company was accused of omitting names of two executives convicted of bribery when applying for a license.

Office Raids

Then came a probe into possible bribery involving one of the members of the founding family, which led the hotel unit to delay the IPO, only for Lotte to be hit with a broader investigation days later. On Friday, an army of investigators -- about 200 according to the Yonhap news agency -- raided the group’s headquarters and the offices of some units as part of an investigation involving suspected embezzlement and the use of slush funds.

The events at Lotte have raised fresh concern about the state of corporate governance at South Korea’s powerful, family-led conglomerates, or chaebol. 

With the probes continuing, the company has said it will try to move forward and minimize disruptions, while cooperating with authorities. Hotel Lotte, the world’s third-largest operator of duty-free stores and the biggest in Korea, will have a chance to seek another license later this year as the Korea Customs Service takes bids for permits in Seoul, Busan and Kangwon.

Tourist Shoppers

The government has said it wants more operators of duty-free shops to meet surging demand from overseas visitors for Korean cosmetics and home appliances. The number of tourists increased 10 percent in the first four months of this year, led by those from China and Taiwan, according to the Korea Tourism Organization.

Duty free operators have also looked outside South Korea for growth. Samsung Group’s Hotel Shilla Co., South Korea’s second-biggest operator, currently has stores in Singapore and Macau. Hotel Lotte also has operations in Japan, Guam and Indonesia.

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