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(LEAD) (News Focus) Lotte's core projects in limbo amid prosecution probe

All News 16:06 June 13, 2016

(ATTN: UPDATES with Lotte's listing withdrawal in paras 7-9; prosecution's investigation in fifth para from bottom)
By Kim Eun-jung

SEOUL, June 13 (Yonhap) -- South Korean retail giant Lotte Group is facing yet another stumbling block following a bitter succession feud as its major business projects are facing delays or cancellations amid a widening probe into its lobbying and slush fund allegations, industry watchers said Monday.

Lotte, South Korea's fifth-largest conglomerate, has come under a high-profile investigation as prosecutors on Friday raided the offices of its headquarters, seven affiliate companies and the houses of key executives, including group Chairman Shin Dong-bin, to look into allegations of illegal slush funds and other shady business practices.

This raid comes less than two weeks after prosecutors raided the offices of Lotte's duty-free business, the founder's eldest daughter and the incumbent chairman's sister Shin Young-ja on suspicion of receiving kickbacks from the chief of scandal-ridden cosmetics brand Nature Republic in return for business favors.

The widening probe into its key figures and affiliates is the last thing Lotte needs as it has been pushing for the initial public offering (IPO) of Hotel Lotte, a series of mergers and acquisitions and the opening of the 123-story Lotte World Tower this year.

The IPO of the hotel and duty-free operator is the key reform pledge the Lotte chairman, the second son of Lotte founder Shin Kyuk-ho, has made to improve the murky governance structure of the business empire following an acrimonious succession battle with his elder brother Dong-joo.

Hotel Lotte had initially planned to go public on the Seoul bourse in late June, but last week pushed back the schedule to July 27 and cut the size of the IPO in the aftermath of the snowballing bribery scandal.

But the July deadline has also become an unachievable goal following the Friday raid because there is not enough time for the company to revise its documents. It has to complete the listing procedure within six months following preliminary approval in January.

On Monday, Lotte said it will "indefinitely delay" the hotel listing, considering "the current situation and protection of shareholders."

"As the Hotel Lotte IPO is a key task for improving corporate governance by lowering the ownership of Japanese shareholders and diversifying shareholders, we will closely consult with the IPO manager and regulatory agencies about the future plan," Lotte said in a statement.

The widening investigation has also dealt a blow to its chemical unit, which has sought to diversify its portfolio following a 3 trillion won (US$2.55 billion) takeover of Samsung's chemical units in October.

Following Friday's raid, Lotte Chemical Corp. canceled its takeover bid for U.S.-based petrochemical firm Axiall Corp.

"We decided to withdraw the bidding considering the overheated competition and the tough situation Lotte is faced with in the domestic market," Lotte Chemical said in a regulatory briefing on Monday. "Separately from the bidding plan, we will continue to maintain a partnership with Axiall Corp."

Market watchers say Lotte's other major projects could also face headwinds, as senior officials are embroiled in the scandal and other irregularities.

Lotte has been seeking reapproval from the government to maintain its duty-free outlet at Lotte World Tower, the license of which is set to expire at the end of this month.

Failure to get a license for the duty-free store that generated some 500 billion won in sales in 2015 could inevitably lead to shrinking profit, which could undervalue Hotel Lotte's IPO should the procedure resume later.

The fate of Lotte World Tower also remains unclear as Noh Byeong-yong, who is in charge of building the Lotte Corp. skyscraper, was arrested over the weekend on charges of selling toxic humidifier disinfectants while he was serving as chief marketing officer of Lotte Mart years ago.

The skyscraper standing next to the Han River in the affluent Gangnam Ward partially opened last year despite lingering safety concerns, but it still faces the daunting task of reassuring shoppers who remain jittery over its safety.

Prosecutors are also looking into suspicions that Lotte officials lobbied government officials from the previous administration to get approval for the construction of the nation's tallest building near a military airport.

To make matters worse, the family feud doesn't seem to be put to rest.

In the midst of the turmoil, Shin Dong-joo, the former vice chairman of the Tokyo-based Lotte Holdings, has once again waged an offensive against his younger brother.

Dong-joo has claimed that he is his father's hand-picked successor and is currently taking care of his 93-year-old father, who has been hospitalized, in what could be a move to project the image that he is the heir. Dong-bin has argued that his father is unable to make reasonable judgments due to mental health problems.

Dong-joo has reportedly demanded that Lotte Holdings shareholders vote on his proposal calling for the dismissal of Dong-bin and Lotte Holdings President Takayuki Tsukuda from the post of company director at the shareholders' meeting. Lotte Holdings is expected to adopt the proposal as a formal agenda item for a vote, according to officials.

Dong-bin prevailed in two previous shareholders' meetings, including one in March that cemented his hold on Lotte in a power struggle with his elder brother.

Still, Dong-joo has asked Lotte Holdings to set up an emergency consultative meeting ahead of the shareholders' meeting, citing the crisis over the prosecutors' investigation and alleged malpractice carried out under the current leadership.

"We have completed an analysis of the financial statements of Hotel Lotte," Kim Soo-chan, the legal representative for Shin Dong-joo, told Yonhap News by phone. "We will closely watch the prosecution's investigation and decide on whether to use the documents for any actions."

All of these challenges could put a heavy burden on Shin Dong-bin, whose close aides are being questioned over their involvement in the creation of alleged slush funds and other shady practices.

According to sources with knowledge of the investigation, prosecutors have traced dubious funds worth 30 billion won that the founder and the incumbent chairman created through affiliates.

Despite rising pressure, Lotte officials remain confident that the prosecutors' investigation is unlikely to affect Dong-bin's management control, saying there is no sign of unrest among the major shareholders in Lotte Holdings.

Currently, the Lotte chairman is on a business trip to Mexico and the United States and is scheduled to return home later this month.

Although Lotte withdrew its bid for Axiall, Shin plans to attend the opening ceremony of an ethane cracker in Louisiana, a joint project between the two companies, according to senior Lotte officials.

"Shin had planned to return this weekend, but the shareholders' meeting of Lotte Holdings has emerged as a new factor," a senior Lotte official said. "The chairman is likely to stay in Japan until the shareholders' meeting before returning (to Seoul)."


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