The Lotte Group is en route to a drastic change in its corporate governance structure through a transition into a holding company structure.
On August 29, the spin-off and merger plan was passed at general shareholders' meetings of four affiliates, which will allow the birth of a holding company, cutting off the cross-shareholding chain and ensuring transparency in the governance structure.
The successful merge will lead Shin Dong-bin, the chairman of the Lotte Group to strengthen his management rights by overcoming a challenge from Shin Dong-joo, a former vice chairman of Lotte Holdings, Japan.
In addition, Lotte has come to seize an opportunity to address a “Japanese company” controversy which was generated during a dispute over management rights to the group. Chairman Shin Dong-bin has expressed his will to improve corporate governance since 2015. In the course of a dispute over control of the group between two brothers, its opaque governance structure was revealed and controversy over its nationality spread widely. These situations put Lotte in the biggest crisis since its founding. So at that time, chairman Shin announced his plans to improve the governance structure of the Lotte Group along with a direct apology to the people. Consequently, the group’s conversion into a holding company structure has been considered as a key way to improve the group’s governance structure and enhance its transparency with the listing of Lotte Hotel.
Lotte had originally pushed forward with the listing of Lotte Hotel last year, but the prosecution's intense investigation started and eventually the listing plan was called off. As the listing was delayed, Lotte changed its priorities and went ahead with a transition into a holding company.
With the group’s conversion into a holding company structure, Lotte will cut off links of its complex cross-shareholding. Eliminating the cross-shareholding line will make its governance structure simple and transparent. In 2015, Lotte reduced the number of its cross-shareholding links from 416 to 67, and a conversion into a holding company structure will cut down on the number of the links to 18.
Currently, Lotte Shopping and Lotte Confectionery have 63 and 54 links, respectively, and the two companies share 50 of them. Even if the two companies rid only their cross-shareholding links, most of the group’s cross-shareholding links will disappear.
Lotte Confectionery has a long cross-shareholding chain that connects nine companies. The chain involves, in sequence, Lotte Confectionery, Lotte Chilsung, Lotte Food, Lotte Logistics, Lotte Corporation, Korea Fuji Film, Lotte Shopping, Lotteria, Daehong Planning and Lotte Confectionery. The listed companies such as Lotte Shopping, Lotte Confectionery, Lotte Chilsung and Lotte Food are all linked to a cross-shareholding chain.
When Lotte Holdings is launched, its governance structure will be strengthened as equities scattered in affiliated companies are collected by the merged investment company. Therefore, it will be no longer necessary to maintain a cross-shareholding structure, and if the subsidiary at the bottom of the cross-shareholding structure sells a stake in the merged investment company at the top of the structure, the cross-shareholding chain will be cut off.
The launch of the holding company is expected to solidify chairman Shin Dong-bin's control of the Lotte Group. A conversion into a holding company structure will be analyzed as Lotte's efforts to secure management transparency and cement governance structure. The Lotte Group will become a powerful holding company with core subsidiaries such as Lotte Confectionery, Lotte Chilsung, Lotte Shopping and Lotte Food. Chairman Shin will take over the holding company.
Based on Lotte’s biannual report in the first half of this year, Shin Dong-bin had a 9.07-percent stake in Lotte Confectionery, a 13.46-percent stake in Lotte Shopping, a 5.71-percent stake in Lotte Chilsung, and 2.0-percent-stake in Lotte Food. Shin Dong-joo, a former vice chairman of the group, owned a 3.96-percent stake in Lotte Confectionery, a 7.95 percent-stake in Lotte Shopping, a 2.83-percent stake in Lotte Chilsung and a 2.0-percent stake in Lotte Food.
It is said that chairman Shin Dong-bin will have a 10.56 stake in the holding company established through split-ups and mergers and Shin Dong-joo, a former vice chairman will a 5.73-percent stake. Apart from them, Lotte Hotel (6.56 percent) and Lotte Aluminum (6.32 percent) are major shareholders of the holding company. The stake of Shin Kyuk-ho, founder of the Lotte Group will hit 2.92 percent.
These are estimates based on current stakes. It is forecast that chairman Shin will enhance his power through re-mergers, exchanges of shares and listings in the future.
In the securities market, some forecast says that Shin Dong-bin's stake will reach 20%, and if friendly shareholders' stakes are added, chairman Shin's stake will soar to 50%.
In addition, analysis says that a transition into a holding company structure will strengthen shareholder-oriented management, revaluate undervalued corporate value, boost management efficiency through the separation of investment and business operation and secure management stability.
The Lotte Group expects controversy over whether or not Lotte is a Japanese company will subside if the holding company is launched in October. Lotte Hotel has been playing the roles of the holding company of the Lotte Group. However, Lotte affiliates in Japan hold more than 98% of shares in Lotte Hotel.
A Lotte Hotel IPO has deadlocked but the establishment of the holding company can make the Lotte Group from the controversy to some degree. The holding company will own more equities than Hotel Lotte, so Japanese shareholders’ influences on Lotte will taper off.
However, chairman Shin cannot take a total control of the Lotte Group in Korea by launching the holding company. Although chairman Shin eclipses Hotel Lotte in stakes, the combined total equities of Japanese shareholders are nearly as many as those of Shin.
In the future, Lotte is expected to continue taking steps to strengthen its governance structure. In the long term, under consideration is a plan to list Lotte Hotel on the stock market again and merge the holding company and Hotel Lotte.
"The holding company established through the first split-ups and mergers is not taking a full control of Lotte Shopping, so it is expected that additional divisions, mergers, large stakeholders’ equity investment and exchanges will continue in the future," said Nam Ok-jin, a researcher at Samsung Securities.
However, on August 25, vice chairman Lee Jae-yong of Samsung Electronics was sentenced to five years in prison in the first trial court, Shin Dong-bin, a dark shadow is cast on the first judgment on Lotte Group chairman Shin and chairman Shin cannot be happy with the results of the general shareholders meeting of this year. If the absence of the head of the group comes to the realization, group renovation work related to the governance structure may be put on hold.
In particular, Shin Dong-joo, a former vice chairman of Lotte Japan Holdings who is in a dispute with chairman Shin Dong-bin over management rights is convinced that Shin will be convicted of bribery, and expects management rights issues to rise again in Japan.
If chairman Shin Dong-bin receives a prison sentence and is vacated from the chairmanship, his position at Lotte Holdings, the de-facto holding company of the Korean and Japanese Lotte Groups, will become unstable and may be excluded from the management of the Lotte Group in Japan.
In addition, as earnings normalization following management efficiency is rising as a top priority issue after Lotte's conversion into a holding company structure and the performances of major flagship affiliates are deteriorating due to retaliation by Chinese authorities which was triggered by the deployment of the THAAD System. This is spelling a big trouble for the Lotte Group. For this reason, some of the financial investment industry expects a step-by-step restructuring scenario for insolvent overseas subsidiaries such as those in China.