The pending sale of Lotte Group’s credit card unit, Lotte Card, appears uncertain, as the CEO of its preferred bidder, Hahn & Co., faces an investigation over alleged tax irregularities -- a development that could preclude the private equity firm from completing the acquisition.
Further complicating the situation, Lotte Card’s labor union has strongly opposed the idea of a takeover by a profit-driven PEF due to concerns of employment stability, pledging group action to fight the merger.
Lotte Card is one of three financial units being sold by Korean-Japanese retail conglomerate Lotte Group, alongside Lotte Non-Life Insurance and Lotte Capital.
The sale is taking place as part of Lotte’s steps toward adopting a holding company structure. Under Korean law, which mandates separation of financial and industrial capital, a holding corporation cannot possess financial subsidiaries.
Lotte, which established Lotte Holdings in October 2017, is required to let go of its finance units within two years, meaning the conglomerate must sell off its financial assets by October this year.
In light of this deadline, Lotte had selected Korean PEF Hahn & Co. as the preferred bidder for Lotte Card, and it had held negotiations to close the deal.
Hahn & Co., the second-largest PEF in Korea following MBK Partners, manages some $3 billion in assets. It reportedly proposed buying an 80 percent stake in Lotte Card for around 1.44 trillion won ($1.25 billion). Lotte’s subsidiaries would become minority stakeholders.
However, the Lotte Card deal has hit a snag, as Hahn & Co. CEO Hahn Sang-woo has been accused of tax irregularities, with the prosecution launching an investigation this month.
Union workers of local telecommunications firm KT and a local civic group jointly accused KT Chairman Hwang Chang-gyu and executives as well as the Hahn & Co. CEO of breach of trust and tax evasion, respectively, at the Seoul Central District Prosecutor’s Office in March.
They claim that the KT chief and executives led the company to acquire N Search Marketing -- the advertising agency unit of Hahn & Co. -- at an overpriced figure of 60 billion won, when the agency’s fair value was actually only 17.6 billion won.
The group also accused the Hahn & Co. CEO of not paying a gift tax for its excess earnings under the inheritance and gift tax law on which the legal claims are based.
Based on the testimonies gathered, the prosecution launched an investigation on May 8.
Hahn & Co. asserts that the union's claims are groundless and that the transaction at issue had no legal breaches.
“Under any legal or tax opinion, it is undoubtedly clear that neither tax valuation guideline nor gift tax has any relevance to any M&A transactions between unaffiliated companies,” Hahn & Co. said in a statement regarding the accusations.
“Every aspect of the New Search Media acquisition transaction between Hahn & Company and KT / NasMedia (a KT affiliate), was carried out in a manner transparent to all stakeholders, fully compliant with the relevant laws, and based on fair market value of New Search Media,” it said.
The alleged tax irregularities, if recognized by the court, would effectively make Hahn & Co. ineligible to become a majority shareholder of Lotte Card.
Under Korean regulations, a company seeking to become a majority shareholder of a corporation must not have received a punishment heavier than a monetary penalty for violating fair trade laws, in the past five years. But the financial regulator is able to make an exception if the violations are deemed minor.
Given the circumstances, Hahn & Co. may or may not be eligible to take over Lotte Card, depending on the outcome of the legal proceedings. There is also the possibility that such issues may not be sorted out before the October deadline.
Meanwhile, the official priority negotiations period for the sale of Lotte Card expired as of May 13, without a final deal.
Lotte is reportedly committed to continuing talks with only Hahn & Co, but the expiration means that Lotte is technically able to consider other bidders -- such as Hana Financial Group and a consortium of MBK Partners and Woori Bank -- as new buyers, according to industry watchers.
Further complicating the path for Hahn & Co.’s purchase of Lotte Card, the credit card firm’s labor union has resolved to fight the takeover, in a statement posted on its website May 10.
The union says an internal survey found that 87 percent of Lotte Card employees oppose the takeover by the PEF, as the sale to a profit-driven buyout fund could initiate massive layoffs and decreased investment.
An overall downturn in the local credit card sector -- weighed down by alternative mobile payment services and legal changes that have driven down profits from card transaction fees -- has also contributed to concerns over Lotte Card’s profitability and layoffs.
By Sohn Ji-young (firstname.lastname@example.org)