The transaction comes seven months after Lone Star pulled out of an agreed sale of its entire 64.6% stake to Kookmin Bank after the deal had been delayed for more than half a year due to legal investigations into both Lone Star and KEB, as well as virtually any institution connected with the sale. Lone Star had been due to reap W6.95 trillion ($7.4 billion) from the sale of its share in KoreaÆs largest bank.
The sale of an 11.3% stake through the equity markets overnight has therefore raised questions about whether the firm may have decided on an alternative route for the divestment û especially since smaller sales through the market might be less upsetting for the domestic critics who have taken issue with the large profit Lone Star is set to make when it exits KEB.
However, sources said last night that this was not the case, and that Lone Star has no intention of giving up the premium that it should be able to fetch from a sale of a controlling stake in the bank. By some estimates, that premium may be worth as much as 30%. Last nightÆs sale was simply a way for it to monetise part of its holdings to cover debt repayments while awaiting a solution that will allow it to do an M&A transaction.
ôAt no point will it give up its control premium, the 51% stake is sacrosanct,ö says one source. ôThe company will now pursue an M&A exit.ö
Underlining that view is the fact that Lone Star has agreed to a six-month lock-up following this transaction, but with a carve-out that allows it to sell a majority stake in case that becomes possible during this period. The private equity firm will still hold 53.3% after last nightÆs sale.
The Credit Suisse-led deal comprised 73.09 million shares that were offered to the market at a price between W13,150 and W13,750, which was equal to a discount of 5.8% to 9.9% versus yesterdayÆs close of W14,600. It was priced towards the top end at W13,600 for a 6.8% discount.
This was well above the 1.1% discount at which a $990 million block of Woori Financial Group changed hands a day earlier. German insurance company Allianz also offloaded a $498 million stake in Hana Financial Group at a 1.1% discount a week earlier.
One reason for the need for a wider discount for KEB, observers say, is the fact that KEB is only about half as liquid as the other Korean banks. YesterdayÆs transaction accounted for as much as 50 days of trading, based on the past monthÆs volumes. It is also not as cheap as Hana, which trades at a price to book multiple of about 1.1, but rather at 1.5 times it is in line with the Korean financial sector average at 1.45 times.
But more importantly, they argue, the pricing is also affected by the pending M&A transaction. Specifically investors are concerned that minority shareholders may not be able to get out at the same price as Lone Star as there is no requirement for the buyer to make a general offer.
However, deeming from the demand, the price range may have been on the generous side. The deal was more than five times covered with over 150 accounts in the book when the order-taking closed after about 4.5 hours. People familiar with the bookbuilding say there was also very little price sensitivity and the final price could have been set at the top of the range, had it not been for the fact that Lone Star wanted to be a bit more generous towards the market.
Like on the previous two Korean bank deals, the domestic demand was solid, while the international portion of the interest was slightly skewed towards hedge funds. The latter is quite logical as the pending M&A transaction makes the share sale almost an event-driven deal. The interest was quite broad-based and came from all the three major regions.
The demand is likely to have been positively impacted by the strong run in the Korean stock market at the moment and the financial sector in particular. The benchmark Kospi index edged 0.6% higher to within 13 points of its 1,807 point closing record on June 19 and Woori Financial gained 3.9% in the wake of KDICÆs sell-down Wednesday.
KEBÆs share price fell 1.7% yesterday before the deal, but has gained 5.3% in the previous three days. It is also up about 22% since the sale to Kookmin was abandoned in November.
Observers say Lone Star was taking advantage of this recent support for Korean financial stocks to book at least some of the returns that it is sitting on as it seems highly likely that an M&A transaction will not be possible until next year at the earliest.
For one, it appears that any sale of a control stake of KEB must await the outcome of the ongoing legal proceedings, which centres on the proceedings related to the original sale of KEB to Lone Star back in 2003. Even without the likely appeals process this will take four to six months at least, according to Korean sources. Later this year there is also a Presidential election in Korea, which is expected to lead to a change in government û a fact which may see the sale drag on for another few months, but in the end could potentially improve Lone StarÆs chances of exiting KEB.
Lone StarÆs desire to pocket part of its profits now is likely linked to the fact that the entire purchase was financed with debt, including the additional 13% it bought from Commerzbank and Korea Export-Import Bank through the exercising of call options in the fall of 2005. Some of these loans are now coming up for repayment and will require cash.
Given that it paid just over W 8,000 each for these option shares, Lone Star will make a tidy return from the sale of this 11.3% stake, even after paying the cost of carrying the debt.
However, that profit is likely to be less eye-catching than the more than $3.5 billion of profit that it was set to receive had the sale to Kookmin gone through. The sheer size of that profit and the fact that will not pay any Korean tax on the gain have been the root of the problem of getting the necessary approvals for the M&A deal. Before being aborted, the transaction managed to energise both public opinion and left-leaning politicians, and stirred a somewhat xenophobic backlash in Korea against foreign private equity firms in general.
Consequently, most bets are on a Korean firm to be the eventual buyer of the Lone Star stake. Aside from Kookmin, interested bidders include Hana Financial Group and Nonghyup, which is one of the original farmersÆ banks. An added benefit from last nightÆs transaction is that the strategic stake will now be slightly smaller and therefore also potentially more affordable for a domestic buyer.
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