Crisis-Hit Lotte Warns More Deals in Jeopardy Amid Probes

  • Korean group says investigations are disrupting its business
  • Lotte says some acquisition talks have been halted or delayed

Lotte Group, which earlier this week scrapped what may have been the world’s biggest initial public offering this year, warned more of its deals are under threat of collapsing because of the widening investigations into the South Korean conglomerate.

The probes have disrupted business activities, while negotiations with companies in North America and Europe have stopped, the group said in a statement to Bloomberg on Tuesday. In his first public comments since the probes, Lotte Chairman Shin Dong Bin apologized for the situation and said he hopes for a speedy conclusion to the investigations.

The group, still reeling from a feud that tore its founding family apart last year, sank into deeper turmoil last week as Korean prosecutors widened their probes into the business empire amid allegations of slush funds and embezzlement. The investigations led the hotel unit to end a potential $4.5 billion IPO, while its chemicals arm withdrew plans to buy Axiall Corp.

"You can’t just go and buy companies overseas while your finances are being investigated," said Park Ju Gun, president of corporate watchdog CEOSCORE in Seoul. "It sounds like Lotte is prodding prosecutors to hurry up because this is affecting their business."

The group postponed the IPO of Malaysian arm Lotte Chemical Titan Holding Sdn. until after the probes are resolved, according to people familiar with the matter. Lotte Chemical Titan, an arm of Seoul-traded Lotte Chemical Corp., was exploring a Kuala Lumpur IPO as soon as the second half of this year that could have raised more than $500 million, people familiar with the matter said in January.

The group’s Hotel Lotte Co. unit was in discussions with as many as five companies from Europe, the U.S. and Australia but such large investments are now difficult to make in light of the probes and the shelved IPO, according to the company’s statement Tuesday.

The lodging unit ended talks to buy a U.S. duty-free-shop operator valued at about 1.7 trillion won ($1.4 billion) and gave up on deals to buy hotels in the U.S. and France, Yonhap News reported on Tuesday, without citing anyone or naming the target companies. Lotte Group’s plan to buy Hyundai Logistics Co. has also been suspended and one of its units canceled a bond sale, according to Yonhap.

Prior to the disruptions, Lotte had been planning to set aside about 1.79 trillion won of the proceeds from the hotel unit’s IPO to acquire overseas hotels, resorts and duty-free retailers, according to the statement.

More Raids

Meanwhile, the raids continue. Lotte Engineering & Construction Co.’s offices in Seoul were among 15 Lotte-linked locations searched on Tuesday as prosecutors launched a second round of raids, according to Yonhap. A Lotte Engineering representative confirmed the company was searched.

“I am sorry that this has recently become an issue,” Shin told reporters Tuesday at a plant groundbreaking in Lake Charles, Louisiana. “I feel responsible and I am telling all subsidiaries to cooperate as necessary.”

In regards to the shelved Hotel Lotte IPO, Shin said the listing is a promise he made to the Korean people so he’ll try to revive it and complete it by the end of the year.

On Friday, prosecutors raided Lotte’s headquarters in Seoul amid allegations of slush funds and embezzlement. Those probes came days after another investigation into possible bribery involving one of the members of the founding family.

In addition to the probes, Lotte’s been in turmoil since 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’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.

The events at Lotte have raised fresh concern about the state of corporate governance at South Korea’s powerful, family-led conglomerates, or chaebol. Lotte, the fifth-largest chaebol, has 89 Korean units with more than 100 trillion won ($85 billion) in assets.

With the probes continuing, the company has said it will try to move forward and minimize disruptions, while cooperating with authorities. Hotel Lotte, which last year lost a key permit to sell tax-free products, will seek to regain that license as soon as this year.

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