Lotte woes seen dampening enthusiasm for South Korea’s record IPO year

HONG KONG: A series of raids on offices of Lotte Group companies have put corporate governance at South Korea´s family-run conglomerates back in the spotlight at a tricky time for investment banks, which had been looking forward to a record year for share sales.

Hotel Lotte, which runs hotels and duty free shops, said on Monday it was postponing indefinitely its $4.5 billion initial public offering due to recent "internal and external issues", amid a widening probe into the company and its parent group.

South Korean equity capital markets had been expected to see a combined $8.7 billion raised in IPOs this year, eclipsing the all-time high $8.5 billion set in 2010.But the setback for Lotte Group, the fifth largest of the "chaebol" that dominate Asia´s fourth biggest economy, could dampen investors´ enthusiasm for other South Korean deals, bankers and fund managers said.

Worries over opaque structures and unpredictable succession plans at the chaebol have been blamed for the so-called "Korea discount".

"The fact that Korean companies tend to trade at a discount to regional peers (is) usually attributed in part to corporate governance concerns," said Singapore-based David Smith, head of corporate governance at Aberdeen Asset Management.  "So yes, investors are alive to these issues.

We certainly are, and that´s why we´ve been very, very picky in our Korea investments.

"Valuations for Seoul stocks are on average nearly 9 percent lower than emerging market peers, and almost 40 percent below developed markets, according to a Mirae Asset Securities report late last year.

Monday´s announcement by Hotel Lotte, which already faced a bribery investigation into one of its directors, came after prosecutors raided offices of Lotte Group and several affiliates on Friday.

People familiar with the matter have said the raids were part of an investigation into a possible slush fund.

Further raids on Lotte Group firms took place on Tuesday, but Chairman Shin Dong-bin said Hotel Lotte´s IPO would be revived, with a planned listing around the end of the year.  Hotel Lotte´s deal was expected to pave the way for other conglomerate listings, including a $2.5 billion IPO by Samsung BioLogics Co Ltd, the biopharmaceutical contract manufacturing affiliate of Samsung Group, and a $1 billion offering by construction equipment maker Doosan Bobcat Inc.  Global investment banks were hoping for a fee bonanza from the deals.

"Could it make people more wary around Samsung BioLogics and other ones that are coming down the pipe? Yes, for sure," said a Hong Kong-based equity capital markets banker who is working on several South Korean IPOs and asked not to be named.  Samsung BioLogics declined to comment.

A spokesman for Doosan Infracore, Doosan Bobcat´s parent firm, said the company was preparing to apply for a preliminary exchange approval for an IPO with plans to list within this year, without elaborating.

No indicative pricing has yet been announced for either deal.

While there were no immediate signs of other planned IPOs being derailed, some fund managers expect sentiment for IPOs to take a hit.

"When there´s a degree of uncertainty obviously the discount that needs to be associated with that is going to be significantly higher," said Joshua Crabb, head of Asian equities at Old Mutual Global Investors in Hong Kong.

"For a lot of people, given the open-ended nature of these kinds of issues, it can result in a lot of them not even applying a discount, but just being unwilling to take part.

"The potential slowdown in South Korean IPOs comes at a particularly bad time for global investment banks grappling with fewer equity deals in the region.

IPOs and other equity capital market deals make up about half of investment banking fees in Asia Pacific.  South Korea generated $6.5 billion in investment banking fees from equity, debt and merger deals in the past 10 years.

"The big unknown is how long this will drag on and how ugly it may get," said a senior Hong Kong-based investment banker who is involved in several South Korean IPOs and M&A deals this year.