Jun 10, 2016
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Seoul prosecutors raid Lotte Group, casting new shadow over hotel unit IPO

Jun 10, 2016

South Korean prosecutors raided the offices of Lotte Group, the country's fifth-largest conglomerate, and several affiliates on Friday, dealing a further blow to its hotel unit's planned IPO, billed as the world's biggest this year.

The main Lotte Duty Free store, Seoul - Lotte

Hotel Lotte, one of the affiliates raided, cut the size of the deal to a maximum $4.5 billion on Tuesday and pushed back the listing to July after prosecutors launched a bribery investigation into a director.

About 200 investigators searched 17 locations including group headquarters in central Seoul and the homes of Chairman Shin Dong-bin and other key executives, local news agency Yonhap reported, citing the Seoul Central Prosecutor's office.

The probe marks a fresh bout of turbulence for Lotte, one of the best-known of the big family-run conglomerates, or chaebol, that dominate Asia's fourth largest economy, after it was rocked by a bitter succession feud last year.

Hotel Lotte, Lotte Department Store and Lotte Home Shopping confirmed that raids were taking place at their offices. A Lotte official, who declined to be identified due to the sensitivity of the matter, said Friday's raids had not been expected.

Three people with direct knowledge of the matter told Reuters that the raids were part of an investigation into a possible slush fund. They also declined to be identified.

One person said prosecutors were also looking into possible breach of trust related to asset transactions among affiliates.

The Seoul Central Prosecutors' Office declined to comment.

Lotte Group declined to comment on the reason for the raid, when asked whether it concerned a possible slush fund.


A person working on the Hotel Lotte IPO, who declined to be identified, said bankers were awaiting further information.

"It complicates things considerably, of course," the person said. "We don't know what they were looking for, what they took."

A Hotel Lotte spokesman said it is too soon to talk about any changes in IPO plans as investigations are ongoing.

Despite its name, Hotel Lotte's biggest money-spinner is duty-free shopping, which accounted for 86 percent of first-quarter revenue. It is the world's third-biggest operator of shops selling tax-free luxury goods and cosmetics to tourists.

On Friday morning, dozens of Chinese tourists queued as usual to access elevators to the flagship Lotte Duty Free outlet in the group's headquarters complex, as TV cameras waited for investigators to emerge from doors around the corner.

South Korea is the world's largest duty-free market, and the bribery investigation is seen as a threat to Hotel Lotte's bid for a coveted duty-free retail licence in downtown Seoul due to be awarded in a bidding process later this year.

Last year's highly public power struggle within the group's founding Shin family drew widespread criticism.

Hotel Lotte's planned flotation of around 35 percent of its shares was intended to bring transparency and improve corporate governance at a group whose ownership structure is convoluted even by the opaque standards of South Korea's chaebol.

Shin Dong-bin, the younger son of the group's founder, prevailed over his older brother to head the group.

Shin is currently in the United States, people familiar with the matter said.

"Lotte will likely delay the IPO a bit further and wait for the public outcry to die down a bit," said Park Ju-gun of corporate analysis firm CEO Score.

"Shin Dong-bin needs to do the IPO because of not only his promise last year but also because Lotte Group continues to expand and needs to raise money from the outside," Park said.

Shares in Lotte Shopping, which counts Lotte Department Store and Lotte Home Shopping among its units, fell 1.3 percent on Friday. Lotte Himart, a consumer electronics retailer, dropped 3.1 percent.

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