Lotte kicks off hotel IPO amid family feud

The listing of Lotte Group’s retail, hospitality and entertainment business comes amid an intensified power struggle between the two sons of founder Shin Kyuk-ho.
Hotel Lotte operates Lotte World, an amusement part located in Seoul
Hotel Lotte operates Lotte World, an amusement part located in Seoul

South Korea’s Lotte Group started marketing the long-awaited initial public offering of its duty free chain and hotel business on Friday, offering investors an opportunity to buy into an internationally recognized retail and hospitality brand as the group reorganises its ownership structure.

According to preliminary terms, Hotel Lotte is targeting as much as W5.7 trillion ($4.8 billion) from the sale of both new and existing shares. It will be the country’s biggest IPO if it prices at the top of its indicative range, surpassing Samsung Life Insurance’s $4.4 billion in 2010.

Bankers said the listing of Hotel Lotte was brought about by regulatory issues instead of fundraising needs because the group was asked to untangle the web of intersecting shareholdings among its affiliates as part of a Fair Trade Commission investigation.

The group is listing Hotel Lotte because it is the centerpiece in the web of cross-shareholdings. By introducing public ownership at the top level, the group could indirectly reduce its shareholdings in other affiliates.

Being a public company, Hotel Lotte will be subject to higher disclosure requirements and therefore the group could improve its corporate governance as the antitrust regulator has requested.

From investors' perspective, equity transactions borne out of regulatory issues are often well-received because of an assumption that asset owners normally keep the best business private while selling second-tier assets to the public. As such, investors generally see these deals as good assets being forced to be sold to the market.

Samsung Group, South Korea’s largest family-controlled conglomerate, listed its de facto holding company Cheil Industries in a $1.4 billion IPO in 2014 as part of its effort to reduce cross-shareholdings and prepare for generational succession. Shares of Cheil Industries more than doubled on the first trading day and subsequently rose another 50% within two weeks.

In another example, Indonesian cigarette maker Sampoerna saw its shares pop up 25% shortly after its parent Philip Morris sold Rp20 trillion ($1.4 billion) worth of shares last year due to new stock exchange rules requiring higher public float of shares.

Prospective investors could find a similar case in Lotte this time because the group is now taking the most popular businesses public, including hotels, duty-free shops and theme parks. By comparison, Lotte’s existing listed units such as chemical and insurance are less well-known, particularly among foreign investors.

Complex structure

According to Korea’s Fair Trade Commission, Lotte Group has the most complicated corporate structure among all family-owned conglomerates, known as chaebol. Lotte Group has 67 cross-shareholding ties as of February, although the number has drastically decreased from 416 last year after a series of share transfers between the affiliates.

During the corporate restructuring, Hotel Lotte has strengthened its position as the group’s holding company by taking stakes in other Lotte units.

According to a company statement, Hotel Lotte paid approximately $90 million to acquire 12% in Lotte Aluminum, 3.5% in Daehong Communications and 0.9% in Fujifilm Korea as part of the reorganization.

Currently, Hotel Lotte holds stakes in all six publicly listed Lotte units. They include 12.7% in Lotte Chemical, 8.8% in Lotte Shopping, 5.9% in Lotte Chilsung Beverage, 3.2% in Lotte Confectionery, 8.9% in Lotte Food and 23.7% in Lotte Non-Life Insurance. These shareholdings are worth about $2 billion based on their current share prices.

Yet, ultimate control of the group remains complicated because it involves a number of cross-shareholdings between the founding Shin family’s business entities in Japan, where the group was founded.

Tokyo-based Lotte Holdings is currently the largest shareholder of Hotel Lotte with 19.07% stake, according to the company’s Securities Registration Statement (SRS) filing. The Japanese parent also holds indirect stakes through L4 Investment and L9 Investment, which owns 15.63% and 10.41% in Hotel Lotte respectively.  

Family Feud

One potential downside of the Hotel Lotte IPO is the ongoing power struggle between group founder Shin Kyuk-ho and his two sons.

The sibling rivalry for control of the group heightened in January when the elder son Shin Dong-joo was stripped of key positions he held in several group affiliates -- a move market observers reckon was orchestrated by his brother, Shin Dong-bin.

Shin Dong-bin, the founder's younger son, also removed his father from the post of general chairman of Lotte Holdings.

In a surprise comeback in July, the elder son arrived at a group board meeting with his father, who called for shareholder support to dismiss six senior executives including Dong-bin.

The proposal was rejected by shareholders in an extraordinary meeting held in March this year, allowing the younger brother Dong-bin to further solidify his control over the business empire established by his father 68 years ago.

Such a power struggle means Hotel Lotte investors will face significant risks in terms of the ultimate control of the company.

Business

Still, from an investment perspective Hotel Lotte offers a variety of retail and hospitality businesses ranging from hotels, duty-free shops, amusement parks, golf courses and resorts.

Hotte Lotte owns Korea’s biggest and the world’s third largest duty free retail network. The business contributed 84% of the company’s revenue of W5.1 trillion last year, while it was also one of the two profitable businesses last year among the five key business lines.

In recent years the company was able to capitalise an increase in Korean outbound travellers as well as the number of foreign visitors to improve earnings. Net profit growth has accelerated for three consecutive years to 82% last year from 27% in 2014.

It has also clearly benefited from the increasing purchasing power of Chinese travellers. According to a SRS filing, Chinese customers accounted for 71% of total duty free sales last year, increasing from 63% in 2014. By comparison, sales to Korean customers fell from 27.4% to 21.3% last year.

The hotel business was the second biggest revenue contributor last year but the sector reported a net loss of W34 billlion last year, from a net profit of W24 billion in 2014. It owns 10 hotels domestically and seven abroad, according to the filing.

Hotel Lotte is also the operator of Lotte World, a 1.4 million-square feet amusement park in Seoul that features the world’s biggest indoor theme park.

IPO terms

Indicative terms for the Reg S/144A deal include the sale of 47.85 million shares at W97,000 to W120,000 per share. Lotte Holdings and its subsidiaries will sell 13.65 million existing shares or 29% of the total shares on offer.

On a post-money basis the deal equates to 35% of the company’s share capital.

Half of the deal will be made available to institutional investors, while 20% will be allocated to the domestic retail tranche, 20% for the employee share buyback programme and 10% for a high-risk, high-yield investment trust tranche.

Based on the tentative timetable, Hotel Lotte will conduct an international management roadshow from June 6 to June 16 with a target listing date of June 30.

Joint global coordinators of the IPO are Bank of America Merrill LynchCiti and Mirae Asset Daewoo Securities, while joint bookrunners are Goldman Sachs, Nomura, Korea Investment & Securities and Mirae Asset Securities.

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