Plenty of Work Waiting for Shin
Lotte Group chairman Shin Dong-bin was released from jail on October 5 eight months after his arrestment. He is going to return to work right away.
The group announced on October 7 that Shin will resume his work at his office in the Lotte World Tower on October 8. Shin will receive briefings from group companies, starting with Lotte Holdings, which celebrates its first anniversary on October 12.
Lotte Holdings, which started with 6.36 trillion won (US$5.7 billion) in assets, 4.89 trillion won (US$4.4 billion) in capital and 42 subsidiary companies, have achieved significant results during the year.
First of all, the group’s 67 cross-shareholding arrangements have been completely eliminated and the chairman’s shareholding has risen to 10.5%, reinforcing his control of the sprawling group. In addition, Lotte Holdings secured a shareholding of 20% or more in each of the key subsidiaries, including Lotte Confectionery and Lotte Chilsung, in June, meeting the requirements for a holding company.
Still, major subsidiaries’ underperformance has yet to be addressed along with overseas business reorganization. Lotte Holdings’ sales and operating profit were 4.53 trillion won (US$4.1 billion) and 118 billion won (US$110 million) in the first half of this year, respectively. Lotte Mart China is about to be sold but things are still up in the air when it comes to Lotte Department Store China.
Steps still remain for the conversion of the group’s governance structure into a holding company system. Specifically, Lotte Holdings has yet to comply with clauses that prohibit share ownership in domestic companies other than subsidiaries, and ban simultaneous possession of a non-financial company and a financial or insurance company as affiliates.
To meet the requirements, Lotte Holdings has to sell its stakes in Lotte Card and Lotte Capital and acquire more stakes in Lotte Engineering & Construction. In addition, it has to list Hotel Lotte, Lotte Chemical and Lotte Corporation. These three subsidiary companies have an equity structure in which Hotel Lotte controls Lotte Corporation, which in turn controls Lotte Chemical. Lotte Holdings Japan is the largest shareholder in Hotel Lotte.
As far as financial subsidiaries are concerned, selling to Lotte Corporation, Hotel Lotte and Lotte Holdings for equity exchange is mentioned as a solution. For example, Lotte Card and Lotte Capital can be sold to Lotte Corporation and Lotte Chemical shares can be received to the extent of being capable of satisfying holding company conversion requirements.
Much attention is being paid to the IPO of Hotel Lotte, which came to a halt for the investigation by the public prosecutor’s office in 2016. Although the issue is urgent in various aspects including corporate governance reform, the Lotte Group is prudent with its duty-free shop sales declined in the wake of the THAAD conflict between South Korea and China after the failed IPO. According to insiders, the group is likely to decide on an IPO strategy soon and one of the possible scenarios is investment-business division separation followed by investment division acquisition by Lotte Holdings. IPO-based financial burden alleviation is necessary to that end.
Listing of Hotel Lotte is essential for the group’s governance reform. Japanese subsidiaries in the group currently own 97.2% of Hotel Lotte, which means the chairman needs to gain more control and general shareholders’ presence should be increased by means of listing. It is said that Lotte Holdings’ influence has yet to reach Hotel Lotte. If Hotel Lotte is listed successfully, the next step may be a merger with Lotte Holdings. This is because not only Lotte Holdings’ subsidiaries in the food and logistics industries but also Hotel Lotte’s subsidiaries in chemical and construction need to be encompassed.
The thing is, time is running out for Lotte Holdings. The company was given a grace period of two years in October last year, but it wasted eight months due to the chairman's absence. Only one year is left for it.