The Lotte Group has started reforming its governance structure by putting Lotte Chemical Corp. under Lotte Corp. The move came five days after chairman Shin Dong-bin was released from jail.
Lotte Corp., the group’s holding company, announced after a board meeting on Oct. 10 that it has decided to acquire a 23.24 percent stake, or 7,965,201 shares, in Lotte Chemical from Hotel Lotte Co. and Lotte Property and Development Co. for 2.23 trillion won (US$1.96 billion). Accordingly, Lotte Chemical will be an affiliate of Lotte Corp.
The holding company said its stake investment in Lotte Chemical will not only stabilize the group’s holding company system but also help diversify its business portfolio, which currently is focused on retail and food and beverages. Lotte Chemical is the core affiliate that accounted for 55.5 percent of the total operating profits of the Lotte Group’s non-financial affiliates last year.
In efforts to boost shareholders' value, Lotte Corp. also decided to cancel 11,657,000 of its treasury shares, which took up 10 percent of the total common shares issued, at the board meeting on the same day. Moreover, the company decided to convert 4.5 trillion won (US$3.96 billion) worth of excess capital into an excess income, a sign that Lotte may use some of the excess income as dividends.
As the Lotte Corp. has become the largest shareholder of Lotte Chemical, the Lotte Group can accelerate reorganization of corporate governance as a whole. By taking direct control of the chemical sector, including Lotte Chemical, a cash cow for the group, the holding company will be able to secure capital needed for governance reforms and mergers and acquisitions to be promoted in the future.
Lotte Corp.'s control of Lotte Chemical suggests that the relationship between Lotte Korea and Lotte Japan will be reorganized based on Lotte Korea. The board members of Lotte Corp. will decide on the related plans at its extraordinary general meeting to be held on Nov. 21.
Lotte Chemical posted 2.93 trillion won (US$2.58 billion) in operating profit last year. The figure increases more than 3 trillion won (US$2.64 billion), when the profits of Lotte Chemical’s subsidiaries, like Lotte Fine Chemical Co., are included. Although Lotte Group’s key retail and service affiliates, such as Lotte Shopping and Hotel Lotte, showed poor performance due to China’s retaliation against South Korea for the deployment of Terminal High Altitude Area Defense (THAAD) anti-missile system on the Korean Peninsula, Lotte Chemical put up a good show and it was one of the forces that shored up the entire group.
The fact that Lotte Chemical gets out from under Hotel Lotte and is included in Lotte Corp. means that cash of over 3 trillion won (US$2.64 billion) flows in Lotte Corp. a year. In short, Lotte Corp. will be able to secure funds that are needed for corporate governance reform in the future.
In addition, separating Lotte Chemical from the shareholding structure that connects Lotte Holdings Japan to Lotte Chemical via Hotel Lotte and Lotte Property and Development will greatly reduce the influence of Lotte Japan on Lotte Korea as a result. An official from the industry said, “The influence of Hotel Lotte, which was one of the flagships of Lotte Korea along with Lotte Corp., will be significantly decreased. This is because Lotte Chemical is the most pivotal affiliate in Lotte Group that posts more than 15 trillion won (US$13.19 billion) in sales a year alone.”
Lotte Japan still has the issue of listing Lotte Holdings Japan. Which subsidiaries remain under Hotel Lotte is one of the important issues in the process of listing Hotel Lotte, whose major shareholder is Lotte Japan. Chairman Shin Dong-bin indirectly intends to eventually put Hotel Lotte under the influence of Lotte Korea by separating Lotte Chemical from Hotel Lotte. The inclusion of Lotte Chemical in the holding company also means that the group will decide on whether to list its major unlisted affiliates, including Hotel Lotte, in the near future.
An official from the business community said, “With the inclusion of Lotte Chemical, there will be visible signs of listing Lotte Hotel. This can be interpreted as chairman Shin’s intention to lead the group based on Lotte Korea.”