DBS is being advised by JPMorgan.
But it is not alone. KoreaÆs Kookmin Bank, whom Merrill Lynch is advising is also bidding, as is Hana Financial Group, which is being advised by Credit Suisse.
The Lone Star stake is valued at between $4.3 billion to $6 billion, which alone could make it the largest acquisition in South Korea. But that is just the tip of the iceberg. If any of these three banks acquire the majority stake from Lone Star, whom Citigroup is advising, they would also acquire tag-along stakes from Commerzbank and Kexim. Lone Star owns 50.50% of KEB, but with those two tag-along stakes a successful bidder would own 70.87%. It would have to buy those stakes at the same price which it paid for Lone Star's stake.
In Korea it is vital to own 66% of a takeover target, since then you can control and reconstitute the board. However, under Korean M&A rules, no general offer would be required if the winning bidder bought stakes from Lone Star, Commerz and Kexim since under the Korean rules, you are allowed to buy stakes from 10 parties before making a mandatory general offer.
The contenders
Kookmin is rumoured to have formed a partnership with the Deutsche Bank, but it denied the speculation. Hana, KoreaÆs fourth-largest lender, has teamed up with the National Pension Corp, which needs more aggressive securities investments to boost its pension reserves.
The pairing suggests the government sees it as a favourable bidder. Indeed, according to the Korean media, the National Pension Corp, said it is eager to invest more than W1.2 trillion ($1.23 billion). DBS mades its intentions clear yesterday, and plans to hold a press conference to explain its plans.
Given the rising mood of discontent in South Korea about foreign ownership, the bid from DBS, could be viewed as the underdog. But Singapore has two contenders in the bid. That is because Temasek Holdings also holds 9.89% stake in KoreaÆs Hana as well.
The bid to take over KoreaÆs fifth-largest lender is potentially record-breaking. Lone Star holds a controlling stake in KEB, worth $4.4 billion at current market prices, although the stock is about 15% off its January market high. The bank's market capitalization is around $8.8 billion, down from a peak that surpassed $10 billion.
However, when you look at the total size of the bid, it is evident this deal will be a major boon for the debt and equity equity markets - although all three parties have remained remarkably coy about their financing plans.
Why KEB?
KEB, which was formed as a specialist foreign exchange bank in 1967 and became the darling of KoreaÆs banking sector before the Asian financial crisis, has 317 branches and 27 overseas offices, W73 trillion won in assets and recently has boasted eight consecutive quarterly earnings profits. It made W1.9 trillion in 2005, a record, and at the beginning of March MoodyÆs Investors Service put it ratings watch for an upgrade.
The price to book is 1.3 based on 2006 book value, while the sector average is 1.4. For DBS, which has a 1.48 price to book value based on 2005 numbers, it wouldnÆt be a dilutive deal.
So who is likely to come out on top?
A spitting war of words is already underway. DBS is the outsider as far as Koreans are concerned. Meanwhile Hana argues Kookmin could monopolise the local financial market if it purchases KEB.
In a statement last week, Hana said, "The combined market share of Kookmin and KEB is 39.1%. This means the Korean financial market will be under the control of Kookmin, and the stability and the rule of competition at the banking sector will be disrupted if it wins the bidding."
Meanwhile, Kookmin argues the country needs to have a larger bank if it wants to compete globally. It also counters Hana's numbers, reckoning that its combined market share would only be 25%, which should not be enough to irk regulators.
"I dream of making Kookmin a world-renowned bank, which has a global network like Samsung Group and LG Group," Kookmin CEO Kang Chung-won told reporters last week. "Kookmin wants to advance into global markets after purchasing KEB. We want to utilize KEB's well-organised overseas network to increase our presence in emerging financial markets in Asia."
Some analysts say Lone Star is likely to choose a preferred bidder as early as this month. But realistically, the sale process will take months as it will include a myriad of government approvals û and that of course makes one wonder if government intervention could block some financial institutions from acquiring KEB.
The nation's top financial watchdogs, the Financial Supervisory Commission and the Financial Supervisory Service would have to sign off on the deal. If they stood on open market principles, they would obviously let the highest bid prevail. But if they followed other market rules that fret over monopolies û such as the US, where bank mergers are not approved if the lendersÆ combined market share exceeds 10% in deposits, they might block a Kookmin bid.
As it stands now, if an industry leader's market share surpasses 50%, or the combined market share of the top three players exceeds 70%, the commission defines it as a monopoly or oligopoly.
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