Hotel Lotte bribery probe casts cloud over lucrative duty free licence bid

[SEOUL] For investors eyeing Hotel Lotte's US$4.6 billion IPO, the clearest risk posed by a bribery investigation that forced it to delay and cut the price of its deal is the potential harm to its bid for a coveted duty free retail licence in downtown Seoul.

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

Its home, South Korea, is the world's largest duty free market, and is set to grow further by auctioning more five-year licences this year. Among the criteria for aspiring bidders is reputation.

"For the upcoming duty free licence, the bribery (probe) will have an impact," said Park Ju Gun, head of research firm CEO Score.

On Tuesday, Hotel Lotte lowered the price of its planned initial public offering (IPO) - on track to be the world's largest this year - by as much as 12 per cent and pushed listing to July from June. The revision came after prosecutors opened a bribery investigation into a director. "Depending on the result, the investigation has the possibility to adversely affect the company's reputation and operations," Hotel Lotte said in an amended IPO prospectus.

The company on Thursday told Reuters it delayed the listing to give investors more time to appraise any risk posed by the investigation.

One such risk is losing out on a duty free licence.

Last year, Hotel Lotte failed to receive a licence renewal for a store reopened in October 2014 in its new 123-floor skyscraper. The licence was auctioned against the backdrop of a family feud over succession at Lotte Group, though it was unclear whether the feud affected the outcome.

The loss of the licence was a blow as Hotel Lotte prepared to sell about 35 per cent of itself in an IPO aimed at improving transparency and governance, at a conglomerate whose ownership structure is complex even by Korea's complicated standards.

Its soon-to-be unlicensed store is 20,000 square metres and is Hotel Lotte's second-largest by sales. Last year, sales reached 611 billion won (S$716.4 million), accounting for about 12 per cent of company revenue.

It closes this month.

REPUTATION RISK

The prosecutors' investigation revolves around allegations that director Shin Young Ja conspired with others to receive bribes from cosmetics maker Nature Republic in exchange for duty free store space, Hotel Lotte said in the prospectus.

Reaction to the matter on internet forums and in newspapers centred on it coming so soon after last year's feud, whose public nature was widely criticised.

The customs agency which awards licences said last week it would judge bidders on criteria including charitable record and public opinion.

It will focus on the actions of the company, not those of an individual, said an agency official who was not authorised to speak with media and so declined to be identified.

"Depending on events' progress, the outcome may inform panel members on that point," the official said.

Lotte Duty Free, a division of Hotel Lotte, on Monday said Mr Shin, 73, stepped back from operations in 2012 and was not in a position to influence the business. It also said it chooses the products it sells "fairly and objectively".

Shin, daughter of the Lotte Group's founder and head of the Lotte Foundation charity, was paid 2.27 billion won in salary and bonus last year by Hotel Lotte, a filing showed.

Shin could not be reached for comment on Thursday. Lotte Duty Free declined to comment further as the investigation was ongoing.

FOREIGN CONCERNS

For many Korean investors, Hotel Lotte's IPO is too big to ignore, and several told Reuters the price cut increases the attraction.

But foreign investors are more wary regarding Korean stocks, whose prices are often low relative to other markets due to concern about ownership structures and governance.

Last month, the television channel of group firm Lotte Shopping Co was reprimanded for not disclosing the number of workers investigated in 2014 for receiving bribes or embezzling company funds.

The channel said it has since clarified the number and considers the matter an opportunity for change. "Without a doubt, any company that is subject to these types of issues, obviously that raises the caution, that's why you see these (price) reductions now," said Joshua Crabb, head of Asian equities at Old Mutual Global Investors in Hong Kong.

"It's quite an expensive asset, this (probe) coming along hasn't changed our mind and we're not particularly interested".

Singapore-based fund manager Yoojeong Oh at Aberdeen Asset Management said she was not interested in investing even before the probe due to governance concerns.

Still, she said it was positive Hotel Lotte was listing at all. "It will obviously open them up for more foreign investors coming in and more eyes, in terms of where governance is going."

REUTERS