Shinhan gets Chohung, finally

A key deal for Korea - and a test of the government''s resolve - closes.

When histories of Asian M&A are written, among the many great case studies will be Shinhan Financial's takeover of Chohung. With Chohung staff at one stage threatening to turn off the computers and delete everyone's bank accounts and a new Korean President thrown into the melee, this was a deal that was highly politicised from the start.

First announced in December, the plan was to create the fourth major Korean bank group (alongside Kookmin, Hana, and Woori) making the banking sector look more like the UK or Australia. However, with Chohung not only being Korea's oldest bank, but its oldest company, cultural friction quickly flared up, and efforts by Chohung to kill the acquisition were heated.

To outside observers, the consensus was that if this deal got done it was a positive sign for Korea. But with the political dimension kicking in, a lot of people prepared for the worst.

Yesterday the deal was signed by the government (which is selling its stake in Chohung) and has created the country's second biggest bank by assets. As part of the deal, Shinhan has had to make some concessions on integration and leave Chohung as a stand-alone brand for three years. Clearly "execution risk" abounds and no one is shy of admitting this. Synergies will be found with technology integration, but no one is assuming that anything about the process is going to be straightforward.

Chohung's unions have gained job guarantees. Bankers say one positive dimension is that Shinhan needs to move a lot of people into asset management and bancassurance and can simply retrain Chohung's surplus staff. Once again, that is easier said than perhaps done.

Investment bankers that know Shinhan well say that the bank has always been aware of the risks in this deal but it felt it had no choice. The bank has long felt vulnerable. It does well with high net worth individuals, but was worried that Kookmin might throw resources at this area and use its scale and muscle to competitive advantage. With Chohung, it too gains scale as well as a broader business base and a better deposit base.

The deal's structure is a confusing mix of redeemable preference shares and convertibles, but simply put will mean the government will get 13% of the new Shinhan empire. Shinhan will go to the market immediately also raise W900 billion of cash financing via an issue of preference shares.

Both sides (Shinhan and the government) are keen to spin the headline size of the deal to appeal to their individual constituencies (shareholders and taxpayers respectively).

From the government's perspective it will hope the Korean newspapers report that the deal is worth W3.37 trillion, based on a price of W6200 per Chohung share.

However, if you analyse the blended price of the cash, redeemable preferred shares and redeemable convertible prefs, you can get a valuation of closer to W5000 a share and a headline number of W2.7 trillion. However, if you take into account that the government is getting dividends that are paying below market price, the actual value of the securities may have a blended price closer to W4500-4600, which equates to W2.5 trillion.

One aspect of the deal that will come as no surprise is an indemnification against Chohung's credit card portfolio. Within two years this could change the economics of the deal by a further W820 billion.

All in all, it should be noted that Shinhan is paying less today for Chohung than it would have done had the deal gone through smoothly in December. This is thanks to the fact that Chohung had highlighted so many execution risks and the credit card blow-up also dented valuations. If you assume the blended price of W4500 to be correct, then the December deal was worth W5500, which makes the current deal about 20% cheaper.

The government was advised on the sale of its stake in Chohung by Morgan Stanley and Samsung Securities, while JPMorgan advised Shinhan and will also help with the financing.

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