Lotte’s holding company sets sail, but hurdles remain
[THE INVESTOR] Retail giant Lotte Group officially established its holding company Lotte Corp. on Oct. 12, marking the first step toward streamlining its governing structure to increase transparency. However, the conglomerate still faces significant hurdles before the new system finds stability.
“When Lotte Group celebrated its 50th anniversary in April, we promised that we would become a ‘New Lotte.’ We have been working to fulfill that promise, and this is the first step,” Lotte Corp.’s CEO and President Hwang Kag-gyu told reporters at Lotte World Tower in Seoul on Oct. 12.
Lotte Corp.’s CEO and President Hwang Kag-gyu
Lotte Corp., which is headed jointly by Hwang and Lotte Chairman Shin Dong-bin, was created after dividing four major affiliates -- Lotte Confectionery, Lotte Food, Lotte Chilsung and Lotte Shopping -- into business and investment entities, and combining the investment entities under Lotte Shopping.
The creation of Lotte Corp. has reduced the number of circular cross-holdings from 67 to 13. The remaining 13 cross-holdings must also be dissolved in the next six months to comply with holding company regulations.
Although Lotte Corp. will act purely as a holding company without its own business unit, the company’s top executives kept open the possibility that the holding company would directly invest in new engines for growth and overseas businesses rather than funnel funds through its affiliates.
The company holds 6.4 trillion won ($5.65 billion) in assets and 4.9 trillion won in capital, and controls 42 affiliate companies. According to Lotte Corp.’s head of its finance division Lee Bong-chul, the aim is to increase that number to 70 with an influx of companies mainly from the petrochemical sector.
“We are looking to bring in affiliates that will increase the value of the holding company for our shareholders through methods that minimize the movement of capital,” Lee said.
Increasing the value of Lotte Corp. stock is crucial for Lotte to gain the trust of investors ahead of pursuing listings for other affiliates such as Lotte Cinema.
“We have painful memories from the listing of Lotte Shopping in 2006, when we listed at an excessive price,” said Lee.
Lotte Group still has other tasks to put in order -- most importantly the listing of Hotel Lotte. The hotel arm of the group has acted as a de facto holding company, controlling Lotte’s affiliates through cross-holdings.
Hotel Lotte’s investors include Lotte Holdings Japan as well as a Japanese company that is controlled largely by Shin Dong-bin’s brother Shin Dong-joo. The listing of Hotel Lotte is deemed important to decrease Japanese stakeholders’ sway over Lotte’s Korean businesses and strengthen Chairman Shin’s leadership.
Lotte had sought a listing for Hotel Lotte in the past, but had withdrawn after Lotte faced allegations of bribing former President Park Geun-hye for business favors in the duty-free sector and market conditions worsened.
On Oct. 12, Hwang said the company would “continue to review the listing of Hotel Lotte,” but added that another attempt would likely not come until market conditions such as intergovernmental tensions between Korea and China are mitigated.
“We are hoping for next year, but it’s a political issue so it is hard to say,” an official with Lotte said.
Another issue is the eight finance-related companies that are under Lotte Corp. such as Lotte Card. Lotte Corp. executives said the companies were brought in under the hope that the government would allow the creation of an intermediate financial holding firm.
However, if the intermediate financial holding firm system is not adopted, under the current law, Lotte Corp. will not be permitted to control financial companies and must separate the companies within two years.
Lotte Corp. will be listed for trading on Oct. 30.
By Won Ho-jung(email@example.com)