(BLOOMBERG) – It was once a great blessing for an emperor to have a son. But if he has more than one, succession could threaten to unravel the empire – especially if his grip was weak.
Over six decades, Mr Shin Kyuk-ho turned a chewing-gum business into South Korea’s fifth-largest conglomerate, spanning hotels, shopping malls, movie chains and cafes. It’s no secret that the founder of Lotte Group was near the end of his life: He died over the weekend at 97 after slipping into dementia years ago. While the patriarch involved his children in the family business, Mr Shin never established a clear heir apparent. Miraculously, he didn’t even leave a will, South Korean media has reported.
In South Korea, family-run conglomerates tend to control their labyrinthine holdings with the minimum possible capital outlays. While Hong Kong tycoons typically maintain 40 per cent to 50 per cent stakes to keep their crown jewels close, Korean billionaires often hold around half that. This approach can create a host of problems when there’s a transition of power, and investors are already profiting from a potential palace coup. Lotte Corp, the holding company, rose by as much as 20 per cent on Monday before closing 5.9 per cent higher.
Things are getting even hairier now that traditional family structures are getting tested. At SK Group, South Korea’s third-largest conglomerate, an ugly billion-dollar divorce could strip chairman Chey Tae-won of control if his wife gets the stake she’s seeking. And while primogeniture once went unchallenged, younger brothers and sisters are now clamouring for their share.
That’s certainly the case with Lotte. Five years ago, Mr Shin’s two sons – Mr Shin Dong-joo, the elder, and Mr Shin Dong-bin – were already jockeying for power as their father’s health declined. In July 2015, Dong-joo said Mr Shin had ordered the removal of Dong-bin from the board of Lotte Holdings of Japan. That very day, Dong-bin convened a board meeting and stripped his father of the chairman title. Lotte Corp’s conglomerate discount widened to 45.8 per cent, or roughly US$1.5 billion (S$2 billion) in value, under Dong-bin’s reign, estimates CLSA.
Now the elder brother, Dong-joo, has little hope of regaining his power. Directly and through firms he controls, his younger brother, Dong-bin, has a 21.2 per cent stake in Lotte Corp, estimates Mr Sanghyun Park, an analyst who writes for Smartkarma. Even if Dong-joo inherited his father’s shares and spent all his cash buying Lotte Corp’s shares, his ownership would be just 19.07 per cent.
But all isn’t lost for Dong-joo. The wild card is an 11.1 per cent stake in Lotte Corp held by Hotel Lotte, which is controlled by Lotte Japan. The elder brother could significantly boost his indirect stake in the conglomerate’s Japanese operation by winning over an employees’ union that holds a 28 per cent share. This could put Dong-joo in a position to renew his bid for Lotte Corp’s crown. Lest we forget, he wouldn’t even be a contender if his younger brother had amassed a few more shares over the years.
Investors have learnt to brace themselves for these family feuds. The stock price of conglomerate Hanjin Kal Corp, whose units include flagship carrier Korea Air Lines, has been on a roller-coaster ride since the chairman’s death last April. Since then, the eldest daughter – Ms Heather Cho, who first gained global notoriety for her “nut rage” incident in 2014 – has criticised her brother, now in charge of the family business. She even met activist private equity funds.
With the economy flagging, there is a growing sense that chaebol reform, which swept President Moon Jae-in to power in 2017, is losing steam. But with inevitable deaths, expensive divorces and family theatrics, the president may not need a “chaebol sniper” to unravel these overly complex corporations after all.
Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. She previously wrote on markets for Barron’s, following a career as an investment banker, and is a CFA charterholder.