The Korea Herald


CJ faces hurdles despite chairman’s return

By Korea Herald

Published : Aug. 16, 2016 - 17:37

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[THE INVESTOR] Despite the return of the CJ Group chairman through a presidential pardon last week, the South Korean food and entertainment conglomerate appears to be facing multiple issues before it can gear up for global expansion.

CJ's ailing chief Lee Jay-hyun was freed of his two and a half year jail term through a surprising presidential pardon last week, making way for his return to management.

The chairman's return is likely to lend a major boost to CJ’s stalled push for strategic mergers and acquisitions and boost employee morale, CJ Group said.

“There are high hopes that CJ Group will expedite its decision making process after its management vacuum is fulfilled (through Lee Jay-hyun’s presidential pardon),” said Daishin Securities analyst Kim Han-ey said in a recent report.

CJ Group Chairman Lee Jay-hyun CJ Group Chairman Lee Jay-hyun

However, it might take some time for the CJ chairman to recover from his rare genetic disease. It also has to stabilize its cable TV operating unit CJ HelloVision which recently fell out of a key merger with SK Telecom, according to industry watchers and news reports.

The conglomerate’s multiplex cinema unit CJ CGV faces additional stumbling blocks as the state antitrust agency plans to push charges against the firm for alleged engagement in unfair business practices, they added.

Though Lee is now legally free to return to his post, he will first have to fully regain his health before resuming his role as chairman, a process that will require some time, according to CJ Group.

Lee, 56, has been suffering from Charcot Marie Tooth Disease, a rare inherited neurological disorder, and kidney failure for which he underwent surgery for back in 2013. Such health issues, deemed severe, had been a key consideration that led to the presidential pardon.

“Chairman Lee will focus on recovering his health for now. We cannot say for sure exactly when he will be able to fully return to management at this point,” CJ Group spokesperson Yoon Yeo-jin said.

CJ Group aims to generate 100 trillion won ($90.8 billion) in revenue by 2020, 70 percent of which would come from overseas markets. To do so, the group had been seeking M&A opportunities in the food, entertainment and biotechnology segment.

Yet, such processes, which require elaborate decision-making from the top management, had lost momentum after Lee, who has been bedridden for the past few years, was indicted in August 2013 on charges of embezzlement, breach of trust and tax evasion.

In addition to Lee’s stalled return, CJ’s cable television unit CJ HelloVision is still internally reeling from impacts of the failed 1 trillion won merger with the country’s leading telecom firm SKT.

In November 2015, SKT announced it would acquire a 53.9 percent majority stake in CJ HelloVision from its owner CJ O Shopping, and merge it with its own subsidiary SK Broadband. However, the deal recently fell through after the Fair Trade Commission officially opposed the deal, citing concerns over a market monopoly by SKT in the highly competitive paid TV business.

Though CJ Group stated plans to “foremost focus on stabilizing CJ HelloVision’s operations,” analysts say that the company faces an uncertain road ahead as it seeks to regain momentum amid heated competition continues in the business segment.

“CJ HelloVision performed below market expectations in the second quarter, recording sluggish sales in its main paid TV business and losing subscribers to competitors,” said SK Securities analyst Choi Kwan-sun in a recent report.

“If the company can stabilize its management in the second half of the year and resume normal operations, however, it has potential for growth in the years ahead,” he said.

CJ Group must also resolve its legal issues with the FTC, which plans to charge CJ Group’s multiplex cinema chain operator CJ CGV for illegally carrying out inter-subsidiary transactions.

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FTC plans to charge CJ on illegal inter-unit trading

CJ CGV was found to have received orders from its sister advertising company JS Communications, which is 100 percent owned by Lee Jay-hwan, the younger brother CJ’s incumbent chairman. 

Though inter-unit trading is not illegal here, such actions are subject to criminal charges when it is used to elevate the sales and stock prices of a subsidiary in which a conglomerate’s owner family holds a majority stake.

JS Communications, which produces screen ads for CGV outlets, earned some 56 billion won through inter-unit transactions with CGV from January to September of 2015, which greatly exceeds the 20 billion won limit allowed per year for such type of transaction.

“We are currently waiting for the FTC’s final decision. At this point, we are unable to take any action on this matter,” said Yoon.

By Sohn Ji-young/The Korea Herald (