Korea’s most bitterly fought private-equity exit may finally be imminent. As always, such a claim could turn out to be premature, but after several years of legal battles, regulatory indecision and failed attempts to sell its majority holding in Korea Exchange Bank (KEB), Texas-based Lone Star looks set to move ahead with a deal originally agreed with Hana Financial Group in November 2010.
It would mark the end of a saga that for many Koreans was the most egregious instance of a foreign, predatory acquisition in the wake of the country’s financial crisis in the late 1990s — and that for some overseas investors had come to represent Korea’s antipathy to foreign ownership of its assets.
Late on Friday afternoon, Korea’s Financial Services Commission (FSC) said that Hana, the nation’s fourth-biggest financial company by asset size, could buy Lone Star’s 51.02% stake in KEB, Korea’s fifth-largest lender.
“Hana’s KEB takeover met all the requirements, including proper business plan, financial and management soundness and appropriate funding plan,” the FSC said in a statement. It added that the acquisition did not violate antitrust rules.
However, “experience has shown that nothing ever seems certain in Korea’s dealings with Lone Star”, said a person familiar with deal. “I’ll believe it when it actually happens, and the divorce between the fund and Korea is finalised.”
Late last year, Lone Star agreed to sell its stake to Hana for W3.9 trillion ($3.48 billion), which was the second time it had reduced the price since signing a deal for W4.7 trillion in November 2010.
Hana will pay W11,900 a share for the stake, 46% higher than the stock’s Friday close. It will also buy a 6.25% stake in KEB held by Export-Import Bank of Korea, Hana’s chairman Kim Seung-yu told local media on Friday. Shares of KEB rose 1.5% to W8,150 at the close of trading in Seoul before the announcement.
In February 2011, Hana raised $1.28 billion in equity from Korea’s biggest-ever share placement to help finance the purchase, in addition to funding from domestic bond sales and internal dividends.
If the sale does take place, Lone Star, which is advised by Credit Suisse, will have made a profit of about W4.3 trillion, more than twice the W2.15 trillion it spent on buying the bank in 2003. It sold a 13.6% stake in 2007, collecting W1.19 trillion, and has also received W1.71 trillion in dividends.
Lone Star had tried to sell KEB to Kookmin Bank for $7.3 billion in 2006 and to HSBC for $6.3 billion in 2008. Singapore’s DBS also twice discussed a possible purchase, and ANZ made an approach in 2010, but lost out to Hana.
KEB’s labour unions as well as some opposition party legislators had asked the regulator to issue a punitive sell-off order to Lone Star rather than allow it to walk away enriched. According to a survey conducted by the Financial Economy Institute (a union think-tank) in November 2010, 73.7% of 1,000 respondents said that Lone Star was taking “excessive national wealth” by selling its stake in KEB to Hana.
The National Tax Service accused Lone Star of trying to evade tax in 2005, and the buy-out fund was found guilty of manipulating the share price of KEB’s credit card unit by the Seoul High Court in October last year.
An executive or corporate entity that has been convicted of violating Korea’s banking-related laws during the past five years is banned from holding more than a 10% stake in a bank — meaning Lone Star lost its status as KEB’s main shareholder.
As a result, in November 2011, the FSC ruled that Lone Star should sell at least 41% of KEB — but without insisting on a particular method of disposal. That meant the fund could move ahead on its discussions with Hana. It cut the sale price by 11% in December and agreed to extend the deadline for completion of the deal to the end of February.
But, the call for a punitive sell-off was joined by some leading politicians, perhaps mindful of presidential elections in December this year, and revolved around whether or not Lone Star was, in fact, a non-financial business.
However, the FSC designated Lone Star a financial business operator, so the buy-out fund was not in breach of a law restricting ownership by a non-financial business in a bank to 4%. Lone Star’s sale of its Japanese Pacific Golf Management holdings last December countered union and lawmakers claims that the fund was an industrial operator.
One Korea-based banker could not hide his cynicism, suggesting, tongue-in-cheek, that perhaps the green light was President Lee Myung-bak’s valedictory gift to his old friend, Hana chairman Kim.