South Korea probe into Lotte Group widens with more raids

[June 14, 2016]  By Joyce Lee and Hyunjoo Jin

SEOUL (Reuters) - South Korean prosecutors expanded their investigation into Lotte Group on Tuesday with raids on at least ten firms including its biggest listed unit Lotte Chemical, heaping further pressure on the country's fifth-largest conglomerate.

The probe, which included raids by a 200-strong team on the group's headquarters and other firms last week, ranks as the largest into a South Korean family-run "chaebol" in terms of the number of investigators mobilised, analysts said.

Prosecutors are looking into a possible slush fund as well as breach of trust involving transactions among the group's companies, people familiar with the matter said on Friday.

The fallout from the probe has already seen the derailment of a planned initial public offering worth up $4.5 billion for Lotte's hotel and duty free unit, as well as Lotte Chemical bowing out of bidding for a U.S. company.

Deal-making for Lotte, one of the country's most acquisitive conglomerates, is likely to be on hold for some time, analysts said. A potential acquisition of a U.S duty free operator worth 1.7 trillion won ($1.5 billion) is in doubt now that the IPO has been pulled, a Lotte Duty Free official told Reuters on Tuesday.

The high-profile investigation is also expected to hit investor sentiment not just towards Lotte, one of the country's more opaque conglomerates, but all chaebol, they said.

The probe is "a confirmation of governance problems within Korea Inc," said Park Yoo-kyung, a Hong Kong-based director at Netherlands-based APG Asset Management.

A source at the Seoul Prosecutors' Office with direct knowledge of the matter told Reuters the investigation had been underway for some time, and that the raids had been prompted by signs that Lotte officials were attempting to conceal evidence.

"We couldn't delay anymore," said the source, who declined to be identified as the investigation was ongoing.

Asked to respond to the source's remarks, a Lotte Group spokesman said the conglomerate will cooperate fully with the investigation but declined further comment.

FAMILY FEUD

Ordinary business may also take a hit at Lotte firms raided.

Three officials at Lotte group firms told Reuters that some operations were severely hampered, with computers and documents needed to conduct business having been removed by investigators.

A flag bearing the logo of Lotte Hotel flutters at a Lotte Hotel in Seoul, South Korea, March 25, 2016. REUTERS/Kim Hong-Ji/File Photo

The IPO for Hotel Lotte had been intended to simplify the ownership structure and improve corporate governance at the group after a bitter feud over succession among the founding Shin family last year drew wide public criticism.

Shin Dong-bin, the younger son of the group's founder, prevailed over his older brother to head the group. Currently in the United States, he has yet to comment publicly on the raids.

Named after the heroine of an 18th century Goethe novel, Lotte has grown from its founding in Japan 68 years ago as a maker of chewing gum to a corporate giant with interests ranging from hotels and retail to food and chemicals.

The group, which has more than 90 firms, spent 7.6 trillion won ($6.5 billion) to buy 21 businesses in the past five years - the most acquisitions among South Korea's 30 largest conglomerates, according to research firm CEO Score.

Shares in Lotte Group firms fell again on Tuesday. Lotte Chemical slipped more than 1 percent while Lotte Confectionery and Lotte Chilsung Beverage Co Ltd, which were also raided, lost 3 percent and 4 percent respectively. The broader market edged 0.4 percent lower.

(Reporting by Joyce Lee and Hyunjoo Jin; Additional reporting by Jee Heun Kahng and Se Young Lee; Editing by Tony Munroe and Edwina Gibbs)

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