Koram... Going, going, gone?

Is Koram about to be sold to the highest bidder?

In a week in which Shinhan has flexed its muscles and taken a stake in Good Morning Securities, Friday also saw the bank leak information that it was in talks to acquire Koram Bank and if successful, become Korea's second biggest bank after Kookmin.

The timing of the leak raises questions. Koram has refused to confirm talks - and with good reason since it is starting roadshows on Monday for a capital raising exercise via a GDR. With a growing asset base, this exercise is designed to bring Koram up to international standards and make it a more appealing takeover target.

Koram is controlled by private equity firms, Carlyle and Corsair, which between them own over 40% of Koram and run the board. Both private equity investors will be keen to get the highest return, and it is thought Shinhan is not the only bank in contention. Rumours have long circulated that Standard Chartered is also interested.

Where things get more complicated is an intricate debate over whether it would be more advantageous for Carlyle and Corsair to agree to a merger before the GDR issue - and thus avoid dilution. Or alternatively whether they would get a higher price for their stake if they improved the bank's capital ratios via the GDR and then sold to the highest bidder.

Should the former be the case, then Shinhan has locked itself and Koram into a schedule that would need to see terms agreed before Thursday week when the GDR is supposed to price. In a country famed for price-brinkmanship this could prove an interesting case of who blinks first.

Further underlining this point is the fact that a merged Shinhan/ Koram wouldn't need the capital being raised in the GDR issue.

This aside it is interesting that much of the current financial consolidation in Korea is being driven by foreign private equity firms choosing to exit their investments. In the case of Good Morning, JPMorgan's Hambrecht & Quist chose to sell, and in this case, JPMorgan is also the controlling partner of Corsair. (Speaking of a JPMorgan financial nexus, the investment banking arm of the group is likewise advising Shinhan on its attempt to acquire Koram too).

Typically private equity firms prefer cash purchases. However, it would seem that Shinhan is keen to do an all share deal and that would see Carlyle/ Corsair getting between 15-20% of the new entity. However, it would need to exit this stake later using a block trade. The fact that block trades tend to be done at a discount to the underlying, must be a consideration for both funds.

The ideal situation for Carlyle has always been a bidding war between Shinhan and, for example, Standard Chartered. A foreign bank would also pay cash, and for this reason rumours had always circulated that this was Carlyle's preferred exit strategy.

Another critical aspect of this deal is the Korean takeover code. Or rather, lack of it. In theory, Shinhan could buy Carlyle/ Corsair's 40% stake and not trigger a general offer (to buyout minorities). Or rather, it could offer minorities a different price to that being offered to Carlyle. However, sources say that Shinhan wants to get 100% of Shinhan and moreover wants to offer all shareholders the same price.

Given that private equity firms are very sensitive to gaining the highest price on their investments, it is reckoned that a price accepted by Carlyle would then gain acceptance from minorities.

Shinhan has been under pressure to buy thanks to the success of the Kookmin/H&CB deal, and would need to buy 100% of Koram in order to integrate its systems fully. Koram is a clean bank with a good SME lending business and excellent high-end retail penetration. Taken together the two banks would have a deposit market share of 17.2%, as compared to Kookmin's 35%. It would also be the second largest by loans (17.3%).

One thing is certain, the next fortnight should be an interesting time for the GDR's lead managers, Goldman Sachs and Salomon Smith Barney as they battle with a whole series of unpredictable announcements while roadshowing the bank.

Normally deals get pulled because of market conditions. This could be a first instance where a deal is pulled because a merger has happened instead.


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