Kookmin's decision to merge with Kookmin Credit Card has most people happy with the exception of the unions at Kookmin Card and the business managers at Kosdaq stock exchange.
The merger will see Kookmin Credit Card delisted from Kosdaq in October. This is a major blow for Kosdaq since Kookmin Credit Card is the third biggest stock on the once-booming exchange. Meanwhile, the (former) eighth-biggest stock, NCSoft Corporation recently relisted on the KSE under pressure from its foreign shareholders to delist from Kosdaq.
Kosdaq has unfortunately garnered a reputation for itself as a home for day-traders and unprofitable companies. There are around 800 companies listed on Kosdaq and only 489 are profitable. Just under half of Kosdaq companies are related to IT and recent media attention in Korea has focused on the poor corporate governance among many of its listed companies. Not surprisingly, foreign shareholder interest in the Kosdaq has been muted. When FinanceAsia last wrote a story on this subject in its March magazine, we were informed that foreign investors hold only 10.5% of the exchange's capitalization.
Thus while Kosdaq is battling to rebuild its image, the loss of it bigger cap companies will not help.
Bad for Kosdaq, good for Kookmin
Kookmin Bank is to buy the 26% of Kookmin Credit Card that it doesn't already own and take the entity private. The benefit of this is that it will reduce costs and also help settle fears about the capital adequacy of the credit card entity. Frankly, most bank analysts have been expecting this to happen for quite some time.
The deal is valued at around $217 million and will get Kookmin Credit Card's 12.8 million cards to add to its own 4.58 million.
Its card assets will increase to about W19 trillion, making it the country's third largest after Samsung and LG.
In spite of recent problems, credit cards are a good business, typically generating returns on equity of 30%. Standard Chartered recently expressed an interest in buying a Korean credit card business for just this reason.
Bank analysts in Seoul say Kookmin had been looking at privatizing the card business for a while, especially after it considered the negative capital treatment it may receive under the new Basel 2 capital regulations eventually come into force.
Shareholders of Kookmin Credit Card are being offered the option of taking Kookin Bank stock or cash. If all shareholders agree to take stock this will result in Kookmin Bank issuing 8.1 million new shares and will lead to a 2.5% dilution for existing Kookmin Bank shareholders, according to UBSW. Those who elect to take cash will be bought out at W13,860 per share which equates to 1.9 times declared book value. According to UBSW this would lead to a 2.6% dilution for existing Kookmin Bank shareholders.
Obviously then, Kookmin will be hoping that minorities take stock. This will also be the management's hope for another reason. Kookmin Bank's management is keen to use cash to buy back the government's 10% stake in the bank. Both parties have long been haggling on what this stake is worth in terms of price. The plan is to cancel the stock once it is bought back, but Kookmin's major shareholders, Goldman Sachs and ING will be keen to make sure the stake is bought back at a decent valuation.
