Prosecution raid clouds sale of electronics retailer

Prosecutors raided the headquarters of leading electronics retailer Hi-Mart Saturday amid suspicion of internal corruption involving CEO Sun Jong-koo and senior managers. This is expected to disrupt the sale of the company.

The business community is also paying attention to Sun, 65, whose founding of Hi-Mart changed the landscape of the domestic electronics retail market, which had been dominated by Samsung Electronics and LG Electronics.

▽ Fears over disruption in sell-off

The majority stakeholder in Hi-Mart is Eugene Group, a conglomerate specializing in construction materials. Taking over the electronics retailers from the U.S.-based private equity company Affinity Equity Partners in late 2007, Eugene put Hi-Mart on sale in December last year.

A Eugene source seemed perplexed over the raid, but the group said Sunday, “The sell-off will proceed according to schedule.”

Industry insiders, however, predict that the sell-off will be inevitably delayed.

Korea`s top three discount stores -- Lotte, Shinsegae and Homeplus -- are considered the leading contenders to take over Hi-Mart but have displayed a lukewarm response, saying Hi-Mart shares are priced too high.

Worse, the raid has caused fears over the soundness of Hi-Mart`s financial structure. A distribution industry source said, “The incident is a major variable that could reduce the acquisition price of Hi-Mart or result in nullification of the sell-off itself.”

Others in the sector have raised a conspiracy theory suggesting that someone intentionally circulated suspicion over corruption to hamper the sell-off.

Up for sale is 59.28 percent of Hi-Mart shares, including those held by Eugene (31.34 percent), CEO Sun (17.37 percent), HI Consortium (5.66 percent), and IAB Holdings (2.54 percent).

Citi Global Market Securities plans to conclude the first round of reception of letters of intent Friday.

Eugene Group put Hi-Mart on sale amid intensifying dispute over managerial control between group chairman Yu Kyung-sun and Sun. The conflict flared up after Yu was named co-CEO of Hi-Mart in October last year.

Hi-Mart responded by saying “Eugene pledged to guarantee managerial rights when it took over Hi-Mart,” but Eugene denied this, saying, “The majority stakeholder has the right to participate in management.”

The companies also exchanged verbal attacks. The dispute was seen to be tapering off as Yu and Sun said they would individually serve as CEO. Hi-Mart, however, was put on the auction block four years after the takeover.

▽ Who is CEO Sun?

Sun is former chief of the domestic sales division at Daewoo Electronics. When Daewoo Group, which was struggling amid a weak financial structure, spun off the division in 1999, he persuaded employees to help him establish Hi-Mart jointly with Korea Credit Distribution, an electronics sales company. Sun introduced the concept of “category killer," or sales outlets that sell products from different brands in specific categories, for the first time in Korea.

Hi-Mart aggressively expanded by opening more than 130 shops in 1999 alone to emerge as Korea`s leader in electronics sales. The company also plans to increase the number of stores from 301 to 367 by 2015.

yhkang@donga.com