Lotte Scraps $4.5 Billion Hotel IPO as Probes Deepen Crisis

  • Decision comes day after group signaled deal would be shelved
  • Deal could have been world’s biggest IPO so far this year

Shoppers walk on staircases at the Lotte World Mall in Seoul.

Photographer: SeongJoon Cho/Bloomberg

Lotte Group shelved what may have been a $4.5 billion initial public offering, the world’s biggest so far this year, for its hotel unit after widening investigations pushed the South Korean conglomerate deeper into crisis.

Hotel Lotte Co. decided to hold off on the IPO after talking to arrangers and considering both “internal and external issues,” the company said in a statement in Seoul Monday, a day after the parent group signaled the deal would be shelved. Despite the decision, the company will proceed with plans to expand its duty-free business, it said.

It’s the latest blow to hit the conglomerate, which has 89 Korean units with more than 100 trillion won ($85 billion) in assets. With the group still reeling from a feud that tore its founding family apart, Lotte sank into deeper turmoil last week as Korean prosecutors widened their probes into the business empire amid allegations of slush funds and embezzlement.

“This crisis can be viewed as a problem of governance and lack of transparency at Lotte Group,” said Kim Ho Joon, director of the governance research department at Daishin Securities Co. in Seoul. “In the long term, Lotte needs to fundamentally improve its corporate governance.”

All of Lotte’s eight listed units fell in Seoul on Monday, losing a combined 1.1 trillion won in market value. The shares fell because of the probe, according to Kookhee Han, an analyst at NH Investment & Securities Co.

Crisis in governance

The latest probes came days after another investigation -- one looking into possible bribery -- led Hotel Lotte to delay the IPO and scale back its proposed price range. At the high end, the maximum $4.5 billion offering would still have been the world’s largest so far this year and the biggest ever in Korea.

That would have been a boon for the banks -- Mirae Asset Daewoo Co., Citigroup Inc. and Bank of America Merrill Lynch -- that had been struggling with a slow year for such deals worldwide. For the IPO market, the January-to-March period was its worst quarter since the global financial crisis and this quarter is headed for another slump relative to past years, according to data compiled by Bloomberg.

As to Lotte, shelving the IPO will add to the struggles it’s faced since last year. Besides the probes, Hotel Lotte has been seeking to make up for losing a license in November for its key duty-free business, the company’s biggest revenue source. 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.

After the raid on its group headquarters, Lotte Chemical Corp. said on Monday it withdrew its bid for Axiall Corp., citing the "difficult situation" that it’s facing in Korea. Axiall instead agreed to be sold to Westlake Chemical Corp. for $2.4 billion.

Family feud

Then there’s the power struggle atop the dynasty that founded the group, the fifth-largest of Korea’s family-run conglomerates -- locally known as the chaebol -- that dominate the nation’s corporate landscape.

A year ago, Lotte Group Chairman Shin Dong Bin faced a coup attempt by his older brother and their patriarch 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 has since attempted multiple challenges to Shin Dong Bin’s authority, but to little avail.

Shin Dong Joo, the elder brother, said in a statement last week that this is the biggest crisis that Lotte has ever faced and called for the company to give a thorough explanation of the situation.

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