As South Korea unveiled the details of its long-stalled plan to privatise one of the country’s biggest banks this week, international bankers barely murmured. The reason was simple — none of them were involved in the transaction.
The privatisation of Woori Bank, Korea’s third largest lender by assets, was seen as one of the most lucrative deals for investment bankers in years. The deal ticked all the boxes for fee-hungry investment bankers: it was big, it was high-profile, and it offered the bragging rights that can bolster a reputation.
But when the terms of the government's 30% stake sale in Woori emerged on Monday, global banks found out they had been left out of the process. It is not clear whether Korean banks won advisory slots on the sale, which ended up generating W2.4 trillion ($2.1 billion) for the government — but bankers said international firms were not involved.
This may not have been a great disappointment to international banks. The long and unwieldy sale process, which has previously involved banks including JP Morgan and Citigroup, has given bankers multiple headaches. Some foreign banks have lost interest in the sale, deciding it was too complex and too difficult to execute, according to Korean bankers at international firms.
The sale highlights some of the multiple problems faced by banks working on Korean government deals. But it also underscores quite how much the focus has shifted to the country’s mega-corporations.
Fifth time lucky
When Korean government officials pushed ahead with the stake sale on Monday, they were making their fifth attempt to rid themselves of an asset that has proved surprisingly difficult to shift off the government’s balance sheet.
The sale has proven difficult partly because of the nature of the bank itself. Woori was established in the wake of the Asian financial crisis, as the government shifted poorly performing assets from a raft of banks it bailed-out. Its non-performing loan ratio of 1.1% is still the highest among the four major commercial banks in Korea, although it has come down from a peak of 3.6% four years ago.
But the government does not appear to have helped, imposing some rules that — intuitively, at least — would limit potential demand for the sale.
Previously, the sale of Woori Bank provided a very rare opportunity to take control of a national-level bank. But under the new structure, the government limited each buyer to a stake of between 4% and 10%, meaning none could get absolute control over the bank’s strategy and business direction.
The government may have thought that would simplify discussions. But selling to multiple buyers was just as difficult as selling to one, according to sources.
Woori Bank’s sale is the latest example of how difficult government deals can be. The lengthy internal approval process and the exhaustive compliance pressures are, in particular, a major drain on banks’ resources.
It does not help that the fee pool is miserly.
Stuck in the middle
To many international investment banks, the Korean government is known for paying less lucrative advisory fees than local corporations. In many cases, advisory fees for government-led deals were less than 1% of the total deal value, sources have said.
One source also pointed to the fact that it is hard to win government mandates because it has a selection process that is very different from other jurisdictions.
“The government has a history of picking the bank that ranks in the middle of all the others,” one Seoul-based senior capital markets banker told FinanceAsia. “In other countries you know you stand a higher chance of winning by pitching with lower advisory fees or guaranteeing the best possible results. But in Korea, you won’t know until the announcement date because they tend to pick those in the middle.”
Government deal flows also tend to be less consistent because they are affected by politics, budgets and policies.
Seoul was one of the main issuers in Korea’s capital markets in 2012 and 2013, with multiple share sales through state-run Korea Deposit Insurance Corporation (KDIC) and Korea Electric Power Corporation (Kepco). But it has initiated few major transactions since then.
As such, pitching a government deal in Korea may not be as cost-effective as pitching other local corporations, particularly large family-run conglomerates, which have proven to be a stable revenue source for banks in recent years.
Chaebols steal the show
“It has become more important to retain relationship with chaebols in recent years,” a banker familiar with Korea said. “Many of them are going through succession processes, or are responding to regulator requests to unwind their cross-shareholdings within their affiliates. These in turn provide a decent pipeline of deals for investment banks.”
Samsung Group, Korea’s largest conglomerate, has been perhaps the most active dealmaker in recent years, as it prepares a once-in-a-generation leadership change after the hospitalisation of its chairman Lee Kun-Hee two years ago.
The chaebol has executed more than $20 billion worth of deals over the last two years, including the $8 billion merger between Samsung C&T and Cheil Industries and the billion-dollar initial public offerings for Cheil, Samsung SDS and Samsung BioLogics.
Bankers will be getting another lucrative deal next year after Samsung Electronics agreed earlier this week to buy US auto parts maker Harman International Industries for $8 billion, the largest outbound M&A in Korea history.
Chaebol-led deals are expected to dominate Korea’s capital markets next year. While Korea’s government may have shunned global banks for its latest deal, it should not be surprised if they do the same in the near-term.