Kookmin tipped to win Lone Star's KEB stake

Expect Lone Star to sell its stake in KEB to Kookmin - but don't expect everyone to be happy.
No bank was going to win the hearts of everyone û but US-based private equity firm Lone Star is set to announce today (March 23) its decision to sell itÆs 50.5% stake of Korea Exchange Bank (KEB) to South KoreaÆs top lender, Kookmin Bank, and that is sure to stir debates in Seoul about monopolies, xenophobia and job protection.

Kookmin Bank, Hana Financial Group and Singapore's DBS Group submitted bids earlier in March to buy a majority stake in KEB, South KoreaÆs fifth-largest bank. Alongside Lone Star's stake, there are tag-along stakes owned by Kexim and Commerzbank and this will mean Kookmin will own 70.87% of KEB. Sources close to the deal say the 70.87% is worth about $7.2 billion. Kookmin is apparently still conducting due diligence on KEB's assets û so it is yet to make a final decision on how much to pay.

Given the price range, it means this is likely to become the largest acquisition in South Korea and stand out as the biggest return for a private equity fund from a single deal thus far in the country. The purchase could triple Dallas-based Lone Star's return on its KEB investment, for which it paid $1.2 billion in 2003.

In Korea it is vital to own 66% of a takeover target, since then you can control and reconstitute the board. The deal will raise KookminÆs assets to about W280 trillion, making it one of Asia's top 10 lenders.

It also gives Kookmin a good-looking bank. KEB, which was formed as a specialist foreign exchange bank in 1967, has 317 branches and 27 overseas offices, W73 trillion in assets and recently has boasted eight consecutive quarterly earnings profits. It made a record W1.9 trillion in 2005, and at the beginning of March MoodyÆs Investors Service put it on ratings watch for an upgrade.

The beauty pageant

Once the sale was announced, rumours quickly circulated about who would win the prized crown. Kookmin, though a Korean bank, was criticized because winning the bid might give it too much dominance in the banking sector - with a major market share in many businesses. Louder outcries came from union workers û who fear layoffs are imminent.

The deal will have to go through the Fair Trade Commission. But many speculate that like in the case of Hite Jinro, the regulatory agency will take the view that the creation of a national champion - capable of expanding internationally - will make the decision easier for Korea inc. That opinion is supported by comments yesterday by regulators that they didnÆt initially see a problem with KookminÆs bid û though they did with DBSÆ, but more on that later.

The criticism of Kookmin, as Hana put forward, is that the combined market share of Kookmin and KEB will be 39.1% - although Kookmin disputes these numbers, saying the combined share will only be 25%, which doesnÆt rise to the level of a monopoly. As it stands now if an industry leader's market share surpasses 50%, or the combined market share of the top three players exceeds 70%, the commission defines it as a monopoly or oligopoly.

Many had put their money on Hana, as it teamed up with the National Pension Corp, which needs more aggressive securities investments to boost its pension reserves. The pairing seemed to suggest the government would view it favourably.

DBS meanwhile saw its offer unofficially scuttled on Tuesday when Korea's Financial Supervisory Committee, which is charged with approving the deal, inferred it didnÆt think DBS was qualified to become the largest shareholder of KEB because DBSÆ main shareholder was not a bank.

DBS' largest shareholder - with a 28% stake û is SingaporeÆs state-owned investment company, Temasek Holdings, which is registered as a non-financial company in Korea. Because South Korean banking regulations prohibit a non-financial company and its affiliates from holding a stake exceeding 10% in a nationwide bank, the FSC signalled it wouldnÆt approve the deal.

Some onlookers cried foul û saying, off the record, that moves to bar free-market competition push South Korea backward, not forward, in the eyes of the world. Couple such a decision with KT&GÆs vigorous fight against Carl Icahn, often billed as a Korean-company versus the evil foreigners, and a picture begins to emerge of increasing xenophobia in a nation well-known for its fervent nationalism.

To be fair, the banking sector has seen many stakes sold to foreign investors. This deal, after all, comes after London-based Standard Chartered paid $3.3 billion last year for Korea First, the nation's seventh-largest commercial lender, and New York-based Citigroup paid $3 billion for Koram Bank, the sixth biggest lender in the nation. There are many in the nation who want to see a strong, Korean-owned bank. So the fact that Singapore was not only behind the DBS deal but also holds a 9.89% stake in KoreaÆs Hana as well, was not lost on many onlookers.

Citigroup, which is managing the KEB sale, declined to comment. Officials from KEB, Kookmin, and Lone Star also had no comment.

JPMorgan is advising DBS, Credit Suisse is advising Hana and Merrill Lynch is representing Kookmin.

Unofficial news of the deal drove Kookmin's shares to a near record high of W77,800 on Wednesday. That was after rumours started to circulate on Tuesday û as key bankers were seen out on the town the night before celebrating.

It remains to see what the reaction will be today, when the announcement becomes official. Many expect KEB's union to put on a bandana-resplendent show.
¬ Haymarket Media Limited. All rights reserved.

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