Sickly Lotte IPO reflects two faces of South Korea

June 13, 2016

The author is a Reuters Breakingviews columnist.  The opinions expressed are his own.

Hotel Lotte’s postponed IPO reflects two faces of South Korea. Seoul may be the coolest destination in Asia right now, and the flagship arm of the Korean-Japanese Lotte Group ought to profit handsomely. Plans to raise a maximum of 5.3 trillion won ($4.5 billion) through a stock market listing would have resulted in the world’s largest initial public offering this year. But the IPO is now on hold. That showcases an uglier side of the country: its powerful, opaque and often poorly governed conglomerates.

Today South Korea is Asia’s cultural powerhouse. Neighbours can’t get enough of its food, fashion, cosmetics, and music. And the country has benefited hugely from a boom in Chinese tourism. Seoul is just a short hop from Eastern China, and tourists can shop tax-free not just at the airport, but in downtown retail palaces run by Lotte and others. Despite its name, duty free brings in about five-sixths of Hotel Lotte’s sales.

So far, so glitzy. However, Lotte has been forced to postpone the listing. First Hotel Lotte director Shin Young-ja, daughter of Lotte founder Shin Kyuk-ho, was caught up in a bribery probe. Then prosecutors mounted a string of raids that Reuters, citing people with direct knowledge of the matter, says were part of an investigation into a possible slush fund.

That all makes a terrible backdrop for attracting investors – especially since the IPO follows an embarrassing public struggle between two of Shin Kyuk-ho’s sons for control. On June 13 Hotel Lotte withdrew the IPO, but said it would continue with plans to expand its duty-free business at home and overseas.

South Korean “chaebols” – conglomerates like Hyundai, LG and Samsung – were key to the country’s rapid development but now look anachronistic. They are grudgingly revamping, but complex cross-shareholdings and weak boards have too often allowed controlling families to ignore outside investors. Because it is based partly in Japan, Lotte Group is especially hard to decode. And even compared with other chaebols, ISS reckons major public units like Lotte Confectionery score poorly in matters such as board setup, executive pay, shareholder rights and audit quality, as measured by the proxy adviser’s Governance QuickScore scale. That’s not so cool.

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