The hype over what 
could have been Korea’s largest IPO ever finally died down – at least for now. As an investigation into Hotel Lotte’s unusual investment behavior resulted in the discovery of a group-wide multibillion-won slush fund and embezzlement scandal, Hotel Lotte officially announced withdrawal of its IPO plans on June 13, 2016. Besides derailing the IPO, the investigation also prompted Lotte to drop its approach for U.S.-based Axiall Corporation.
The news does not come as a big surprise, as the IPO, which was pulled once before already, has been looking shaky ever since the group applied for preliminary review for a stock listing in late 2015. Current group chair SHIN Dong Bin had been pushing for Hotel Lotte’s IPO in an effort to streamline the group’s opaque and complex ownership structure and cross-shareholdings following a bitter family feud over the group’s control with his brother SHIN Dong Ju.
On June 10, 2016, over 200 investigators searched 17 locations, including Lotte group headquarters and SHIN Dong Bin’s home, and found evidence involving breach of trust related to merger transactions between Hotel Lotte and Lotte Jeju Resort, such as inflating the value of land and manipulating transaction details. The prosecution also reportedly launched investigation into suspicions that the group bribed former president LEE Myung Bak’s administration in exchange for an improper business advantage.
Subsequently, on June 14, 2016, the prosecution conducted a second round of raids on Lotte Chemical, Lotte Chilsung Beverage, Lotte Engineering & Construction and seven other affiliates relating a secret slush fund the group has been accumulating. The president of Lotte Chemical and several other group executives were barred from leaving the country. Prosecutors are looking into SHIN Dong Bin’s involvement in the alleged slush fund formation. The prosecution has also found evidence of possible unlawful related-party transactions among the group affiliates.
Given the clear need to reform its governing structure by unwinding cross-shareholdings through unlisted companies and establishing a transparent public entity, we take the view that the group is moving in the right direction and are cautiously optimistic on whether the big IPO will come true in the end. However, unraveling questionable related-party transactions, secret slush funds and manipulation of financials may take years, meaning the launch could be pushed back yet again despite SHIN Dong Bin’s determination to get it done by the end of this year.