Tuesday , February 13, 2018 - 10:05 AM
(c) 2018, 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 and his elder brother for control of the conglomerate founded by their 95-year-old father.
“It’s the biggest crisis since the founding of Lotte,” Chung Sun-sup, the head of corporate analysis firm chaebul.com in Seoul. “The growth of Lotte’s business could be stagnant.”
Shin 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.
“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.”
Lotte officials were so confident that Shin 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. Shin, 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 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, Lee Jae-yong, 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. “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 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.
“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’s jailing also puts a spotlight on his top lieutenant, Lotte Corp. Co-Chief Executive Officer Hwang Kag-gyu, who likely will be left to run the conglomerate, Park said.
Shin, who turns 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.
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.
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.”
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