Lotte Group, a Korean conglomerate primarily known for its department stores, is proceeding with plans to take its hotel business public despite a government probe into the group's ownership structure.
Group Chairman Shin Dong-bin confirmed the listing plan on Monday, five days after the Fair Trade Commission said it intended to launch an investigation into the conglomerate’s complex ownership structure.
The FTC investigation of Lotte is part of a broader effort by Seoul to untangle a web of intersecting shareholdings and cross-investing among affiliates of family-controlled conglomerates, or chaebols as they are known in Korean.
The antitrust regulator has asked Lotte to hand over relevant documents.
Second coming
Korea’s fifth-largest chaebol by revenue is returning to the capital market a year after failing to list part of its retail business through a real estate investment trust listing in Singapore late last year.
Price discrepancies between the group and potential investors prompted the decision to pull the planned $1 billion Singapore IPO for Lotte Shopping Reit in December 2014, a source familiar with the situation told FinanceAsia.
At that time, potential investors had pushed for an offer price equivalent to an annualised dividend yield of at least 7% in pre-IPO meetings. That was far from Lotte Group’s expectation of about 6%, the source said.
Market observers believe the upcoming IPO of Hotel Lotte could be the first step to dismantle the overlapping and intersecting shareholder structures of the group's affiliates -- structures which can create conflicts of interest and accounting irregularities.
While Hotel Lotte’s fair value is not immediately known, local reports suggest the business could be valued for as much as W10 trillion ($8.5 billion). As such, the IPO could raise $850 million assuming a minimum 10% free float as stipulated by Korean stock exchange rules.
The listing venue for Hotel Lotte is not immediately known but a person familiar with the situation said an IPO on the Korea Exchange, where most listed Lotte units trade shares, is the most likely platform.
De facto owner
Cross-shareholdings are common among large family-run conglomerates in Korea because the structure allows the founder to retain control over the business empire with the smallest amount of shares.
Lotte Group provides a particularly apt example, being one of the most complex Korean conglomerates with a total of 416 cyclical shareholding structures among affiliates, according to FTC.
Hotel Lotte is widely considered the de facto holding company for all of Lotte Group’s Korean business lines because it has direct and indirect interests in 42 of the group’s 80 affiliates, including all eight of Lotte's listed entities.
Hotel Lotte holds equity stakes of varying size, from 23.68% of Lotte Non-life Insurance, 12.68% of Lotte Chemical Corporation, 8.91% of Lotte Food and 8.83% of Lotte Shopping, to the 5.92% of Lotte Chilsung Beverage, 3.21% of Lotte Confectionary and 0.83% in Nippon Ski Resort Development.
It also holds an indirect stake of 1.52% in Hyundai Information Technology through its interest in unlisted Lotte Data Communication, which purchased a majority stake in the Hyundai subsidiary in 2011, according to the company’s filings.
Hyundai Group is a major Korean chaebol with massive automotive, shipbuilding and construction equipment operations on the peninsula and internationally.
Lotte's 93-year old founder Shin Kyuk-ho is able to maintain control over the business empire by maintaining a control stake in Hotel Lotte, instead of holding stakes in each affiliate.
Hotel Lotte's shareholdings in the various subsidiaries and in Hyundai Information Technology are worth approximately $1.8 billion based on their respective share prices at the current level.
Industry observers believe the listing of Hotel Lotte signals the willingness of the Shin family to improve management transparency.
Apart from the public shareholdings, Hotel Lotte operates 20 hotels in Asia, including 15 in South Korea, two in Vietnam and one each in Russia, Uzbekistan and Guam.
In May, it entered an agreement to buy New York's Palace Hotel for $805 million, marking its first foray outside Asia. The transaction is expected to complete by the end of this month.
Hotel Lotte plans to double its number of hotels to 40 by 2018, according to a company statement.
Deal catalyst
The antitrust watchdog’s campaign against circular shareholdings among large chaebols has had the effect of creating more than $10 billion worth of ECM and M&A deals since last year, and will remain one of the main drivers of public transactions for years to come, according to a banker familiar with the Korean market.
For example, Samsung Group, the largest Korean chaebol that contributes to roughly 25% of the country’s GDP, took its de facto holding company Cheil Industries public in a $1.4 billion deal last year.
Citigroup, JP Morgan, Daewoo Securities and Woori Securities advised Samsung on the largest Korean IPO in 2014.
The restructuring of Samsung Group induced at least two other billion-dollar transactions, including technology services provider Samsung SDS’ $1.1 billion IPO and a $7.7 billion all-stock merger between Cheil Industries and Samsung C&T.
Notwithstanding the breakdown of a $2.5 billion merger between Samsung Heavy Industry and Samsung Engineering due to opposition from shareholders, the group managed to cut its cross-shareholding loops to 10 as of the end of June, according to the FTC.
In a separate follow-on deal, Hyundai Group chairman Chung Mong-koo and his son Chung Eui-sun reaped $1.06 billion by reducing their stake in Hyundai Glovis to avoid new rules that prohibit family holdings of over 30% in a publicly-listed affiliate.
Looking forward, drugmaker Samsung Bioepis is seeking a Nasdaq listing in the first half of 2016. The IPO will allow the entity created by the merger of Cheil Industries and Samsung C&T to dilute its 46.1% interest in the company.
Sibling rivals
An ongoing falling out in the Shin family has resurfaced at a sensitive time for the group. Investors will no doubt take the family feud into consideration as they weigh an investment in the potential IPO.
According to local reports, Shin's two sons have been embroiled in a struggle for control of the company founded by their father 67 years ago.
The sibling rivalry for control of the group reached a new pitch in January when the elder son Shin Dong-joo was stripped of key positions he held in several group affiliates -- a move market observers reckon was orchestrated by his brother, Shin Dong-bin.
Shin Dong-bin, the founder's younger son, also removed his father from the post of general chairman of Lotte Holdings, an entity which looks after the group’s business interests outside Korea.
In a surprise comeback on July 27, the elder son arrived at a group board meeting with his father, who proceeded to dismiss six senior executives including Dong-bin.
The dismissals and succession-related matters will be discussed at the next board meeting, though no date has been set.
Market performance of listed Lotte units were mixed this year amid the long-standing family feud. Lotte Chemical, the group’s largest listed unit by market value, surged 43% since the beginning of the year. Lotte Shopping, the group’s retail affiliate that owns the famous Lotte department stores, has lost 18% of its value in the same period.
