HSBC targets Korea Exchange Bank

HSBC may acquire Lone Star's 51% stake in KEB, but onlookers remain sceptical that the deal will progress given previous hiccups.
HSBC confirmed yesterday that it is in talks with US private equity firm Lone Star to buy a majority stake in Korea Exchange Bank. At current market prices for KEB, the deal could be worth around $5 billion.

HSBC spokesperson David Hall from Hong Kong told FinanceAsia that, in the event of a deal, it is envisaged that KEB will retain its existing listing and name. Protection of employment at the Korean bank will also be a significant factor.

Sources close to the development suggest that it is too early for euphoria and that the HSBC statement confirming the talks should not be construed as suggesting that a deal is imminent. They say that the announcement also does not suggest a change in the stance of the government with respect to private equity investment in general and the Lone Star-KEB deal specifically.

Should HSBC acquire KEB, it will be following on the heels of moves by its competitors, Citi and Standard Chartered.

In February 2004, Citi acquired KorAm Bank from a Carlyle-led consortium of shareholders at an equity valuation of $2.73 billion. Citi launched a tender offer to delist the bank then merged its own Korea operations with those of KorAm and rebranded the combine, Citibank (now Citi) Korea.

The dealÆs pole position as the largest foreign investment in the country was toppled only a few months later when Standard Chartered paid Newbridge Capital $3.3 billion for Korea First Bank in early 2005. Subsequently, Standard Chartered re-branded the bank SC First Bank, combining its own name with that of the target.

The returns private equity investors earned on the two deals, which were not subject to any local tax in Korea, caused ripples of discontent in the country. And the ripples grew into a tidal wave by the time Lone Star tried to sell its 64.2% stake in KEB to Kookmin in 2006 for $7.4 billion.

Lone Star had to contend with legal investigations into its 2003 acquisition of KEB and KEBÆs subsequent takeover of KEB Card. There were charges of share manipulation, arrest warrants for its key Korea-based executives and other allegations, some of which have still not been resolved. So in November last year, Lone Star announced that it was deferring the sale of KEB.

HSBCÆs statements regarding retaining the KEB brand and protecting jobs are widely seen as efforts to package the deal attractively for local constituents and avoid the criticism earlier deals attracted.

In February 2007, KEB declared its first dividend since 1996, which netted Lone Star $444.5 million for its equity holding. Then in June 2007, Lone Star sold an 11.3% stake in KEB in the market, further monetising $1.07 billion of its holding and reducing its stake to 53.3%.

LoneStar has subsequently brought its stake down further to 51%, a level at which analysts widely expect it to stay to enable Lone Star to command a control premium for its ownership.

In its research update on HSBC dated August 20, JPMorgan remains underweight on HSBC but expects that the acquisition of KEB could be EPS accretive for the bank and says the transaction will be ôpositive for Korean banks as greater participation by foreign players would eventually strengthen the financial system and also open the door for more acquisitionsö.

Some analysts suggest the deal could be a positive signal for foreign private equity players, who are waiting to see how the Lone Star KEB saga finally ends to decide whether or not to pursue opportunities in the country.

Efforts to reach Lone Star regarding the HSBC announcement were answered by a no comment from Ed Trissel at Lone Star's global communications agency, Joele Frank, Wilkinson Brimmer Katcher. Lone StarÆs Seoul spokesperson, Kim Ji Ho, could not be reached for comment. Lone StarÆs Seoul-based communications firm, Insights Communications when contacted also had no comment.

HSBCÆs 2006 results announced in March this year reinforce how critical Asia is to the bank. AsiaÆs share of HSBCÆs total group profit grew from 33.8% in 2005 to 39.5% in 2006. Almost $1 billion of profit was added by HSBCÆs Asian business lines outside Hong Kong, correcting a historical imbalance whereby Hong Kong was hugely dominant in Asian profits. An acquisition like KEB will serve multiple objectives for HSBC, cementing its presence in a fast-growing economy and increasing the revenues and profits it earns in Asia.

HSBCÆs motivation to pursue KEB is crystal clear but events to date had led many observers to believe KEB will ultimately be sold to a local bank, which could be a palatable solution for many dissenting quarters. The names of Hana Financial Group and Nonghyup are being bandied about, apart from Kookmin.

KEB shareholders reacted positively to the news and KEB shares gained 7% to close at W13950 ($14.68). The KOSPI index was up 5.7%, in tandem with markets across the region.

JPMorgan research succinctly sums up the prevailing situation: ôregulatory stance in Korea appears to favour (1) domestic bidders and (2) holding back approvals until court proceedings against Lone Star are resolvedö adding that ôscepticism on deal approval remains in placeö.
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