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(News Focus) Hit by corruption charges, Lotte seeks to reboot reform measures

All Headlines 15:43 October 19, 2016

By Kim Eun-jung

SEOUL, Oct. 19 (Yonhap) -- Now that prosecutors ended their investigation into Lotte Group and pressed charges against its owner family, the retail giant faces a daunting task of fending off their corruption allegations, and resuming key business projects and reform measures put on hold, industry experts said Wednesday.

Wrapping up a four-month-long investigation, the Seoul Central Prosecutors' Office said it indicted Lotte Group's chairman, Shin Dong-bin, as well as his father and brother without detention on charges of embezzlement and other business irregularities.

The 61-year-old chief faces charges of orchestrating a series of shady deals at the group's affiliates, as well as giving large stipends to the owner's family for just being listed as board members of the conglomerate's Korean and Japanese branches. Prosecutors suspect the amount of money transacted illegally under Shin's direction to hover around some 170 billion won (US$154 million).

Lotte Group chairman Shin Dong-bin (Yonhap file photo)

His father, Lotte founder Shin Kyuk-ho, was accused of evading gift taxes worth hundreds of billions of won, and his first son and former vice president of Lotte Holdings, Dong-joo, was indicted on charges of receiving underhand allowances worth 40 billion won from Lotte.

Including the founder's daughter and his third wife who face bribery and tax evasion allegations, a total of five members of the founding family of South Korea's fifth-largest conglomerate will stand trial.

Faced with criticism over shady business practices, Lotte vowed to carry out a major overhaul to regain consumer confidence.

"We will try to fix various problems revealed during the investigation and will faithfully cooperate with the legal proceedings," Lotte Group said in a statement.

While the Lotte chairman avoided the worst-case scenario of arrest, Shin has a lot of burden on his shoulders to get flagging projects back on track and push forward reform measures to enhance the business empire's opaque governance structure.

Market watchers have paid keen attention to when Lotte will announce plans of the initial public offering (IPO) of Hotel Lotte, a hidden jewel owned by Japanese shareholders.

The hotel and duty-free operator had initially planned to go public on the Seoul bourse in June, but it was forced to nix the plan amid the widening investigation.

The IPO was the key reform pledge the chairman had made to improve the murky governance structure of the business empire following an acrimonious succession battle with his elder brother Dong-joo.

"The Hotel Lotte IPO is expected to get under way next year considering various circumstances," a senior Lotte official said, declining to be identified. "As some pointed out the earlier listing plan most benefited existing Japanese shareholders, there will be discussions to figure out how to reduce their profits in the process of resuming the IPO plan."

For the offering to take off smoothly, Lotte needs to gain a license for its duty-free outlet at Lotte World Tower in southern Seoul, which was closed in June after failing to renew its license. The store is the nation's third largest with 380 billion won in sales in 2015, but it lost out its bid in last year's competition amid souring public sentiment over Lotte.

Lotte World Tower in southern Seoul is seen in this photo provided by Lotte Corp. on Oct. 3, 2016. (Yonhap)

The duty-free license, whose result is due in December, is also important because the final touches are being applied to Lotte World Tower to get construction approval from the city government by the end of this year.

If accepted, after six years of construction, the 123-story skyscraper standing next to the Han River plans to open an observatory tower in the nation's tallest building in February and open a hotel in April.

All these projects come at a critical time as the investigation has not only hurt Lotte's image but also its share prices.

Since the prosecution's June 10 raid into Lotte's headquarters and other units, the share prices of seven out of nine listed companies took a hit. According to the main bourse operator Korea Exchange, the combined market capitalization of seven Lotte subsidiaries dropped to 7.75 billion won, down 15.8 percent compared with June 9.

Among them, food and retail stocks, such as Lotte Food, Lotte Confectionery and Lotte Chilsung Beverage, took a hard hit as the rising uncertainties over its leadership weighed down investor sentiment.

Market watchers expect Lotte's move to resume its reform measures will positively affect its share prices.

"As prosecutors have wrapped up their investigation, investors will re-evaluate Lotte Group shares that have been negatively affected by uncertainties," said Nam Ok-jin, an analyst at Samsung Securities. "The duty-free license bidding result and IPO plans for Hotel Lotte will be factored into undervalued shares of key affiliates."

Despite its pledges, however, challenges remain as the family-owned conglomerate still faces lingering uncertainty over its leadership and seemingly unending feud between the founder's two sons born in successive years.

In late September, Dong-joo, the former vice president of Tokyo-based Lotte Holdings, filed a complaint with South Korean prosecutors, claiming that his brother and two other officials were involved in cooking the accounting books of Lotte Shopping.

Dong-joo has waged an uphill battle against his younger brother since last July to gain control of South Korea's fifth-largest conglomerate via a series of lawsuits and board room coups, but his past attempts ended in failure.

The estranged brother has repeatedly claimed that Lotte Shopping tried to hide its losses from Chinese businesses, attempting to persuade shareholders that Dong-bin was not fit for the top executive role.


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