Commerzbank divests KEB block

A $726 million deal sets the tone for Lone Star's planned exit
GermanyÆs second largest listed lender Commerzbank AG has sold more than half its stake in Korea Exchange Bank, raising Won703.2 billion ($726 million) from a divestment that sets the benchmark for Lone Star FundÆs exit from the bank.

The block sale, which was jointly arranged by Goldman Sachs and UBS, was priced at the bottom end of the offered price range at a 4.3% discount to TuesdayÆs closing price. The deal marks the second largest equity transaction from Asia ex-Japan this year after Lotte Shopping's $3.5 billion IPO.

The German lender marketed the 52.48 million share deal at Won13,400 to Won13,750. This represented a discount of 1.8% to 4.3% to the latest close. The price was fixed at Won13,400 in the early hours of Wednesday morning (March 1).

The sale was completed at 4.5 times 2005 earnings, or 9.8 times consensus 2006 earnings, and 1.5 times book value. It represented 8.1% of KEBÆs issued share capital and 54% of the pre-transaction free-float, and will see CommerzbankÆs stake in KoreaÆs fifth largest bank drop to 6.5% from 14.6%.

People familiar with the deal said the German bank can sell its remaining shares only if Lone Star gives it the go-ahead, in accordance with a contractual agreement between the two parties.

The share offer was said to have attracted between 60 and 70 investors who ordered 1.4-1.5 times the amount of shares available. More than half the deal went to Asia.

Commerzbank has been a long-term investor in KEB and prior to this sale was the second largest stakeholder in the bank. Late last year, however, it said it intended to sell its entire remaining stake to focus on expanding its operations back home and in Eastern Europe.

The German bank reduced it stake to 14.6% from an original 32.6% in 2003 by selling shares to Lone Star at Won5,400 apiece. At the time, Commerzbank said it had made no significant profit or loss on its shareholding in KEB, which suggests the profit of Won8,000 pre share, or about $432 million, it has made since then will also be close to the actual profit realized from WednesdayÆs transaction.

That would be a sizeable sum, which could add fuel to Korean critics who are unhappy with the amount of profits made û and transferred out of the country - by foreign private equity firms exiting the Korean banking industry over the past couple of years.

KEB has a market value of $9.3 billion following a 55% share price rally in the past 12 months. It closed at Won14,000 on Tuesday, slightly off a 6.5-year high of Won15,700 on January 16. The Korean market was closed for a holiday yesterday.

CommerzbankÆs sale comes as Lone Star prepares to sell its entire 50.5% stake which it bought in October 2003 and which is now worth close to three times the original purchase price of $1.2 billion. In January, the Texas-based buy-out fund hired Citigroup as the lead manager for the sale and so far, Kookmin and Hana Financial Group have expressed interest in bidding for the shares. Both banks are currently conducting due diligence of KEBÆs books.

SingaporeÆs DBS Bank is also said to be interested, although it may reportedly team up with Hana Financial for an official bid. The two banks are linked through Temasek, which owns a stake in both of them. Other foreign banks among the rumoured bidders include Deutsche Bank and HSBC Holdings.

Lone Star is expected to start accepting bids later this month, although the sale may get delayed after a South Korean parliamentary panel voted on Monday to ask prosecutors to investigate whether the private equity fundÆs original purchase of the shares was proper. Lone Star is also under investigation by the Korean National Tax Service regarding tax evasion allegation dating back to 2001 and 2002, but this is not expected to have any effect on the sale of KEB.

The Korean bank has Won64.9 trillion in total assets and posted a forecast-beating and record net profit of Won1.92 trillion in 2005, which was up from Won522.1 billion in 2004. Its return on equity was a sharp 43.9%, although in a recent research note Credit Suisse projected this will drop sharply to 12% in 2006 and 10.4% in 2007 as a result of the fast-growing shareholders equity last year.

The bankÆs capital adequacy ratio has improved to 13.8% at the end of 2005 from 9.47% in 2004, while the non-performing loan ratio halved to 0.9% from 1.82%.

Even before the final tally for the year was in, however, Fitch Ratings upgraded KEB to BBB+ from BBB in December. ôThe upgrade,ö the agency said in a statement, ôreflects the remarkable improvement in (KEBÆs) operating performance, asset quality and capital strength since 2004, as well as a turnaround of its credit card business that has become the most profitable business unit.ö

Despite the strong earnings, Credit Suisse analyst SunMok Ha revised down his profit forecasts for the bank, citing rising costs as KEB will have to resume paying tax in 2006. He also downgraded the stock to neutral because of ôlimited potential upsideö but raised the target price to Won16,000 from Won13,400.

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