Will HSBC get KEB?

In spite of yesterdayÆs announcement that HSBC will acquire Lone StarÆs controlling stake in KoreaÆs KEB, this is far from a done deal.
When you fly into Seoul these days, a video is shown in which a pleasant-looking Korean lady announces: ôFree trade and globalisation have created the risk of introducing pests into KoreaÆs environment. For this reason Korea has some of the strictest quarantine laws in the world. Violating these laws induces severe penalties.ö

The video is aimed at agricultural produce but, as I watched it, I thought it could just as easily apply to foreign private equity firms.

And no private equity firm is more in the public eye û or viewed by KoreaÆs establishment as more of a pest û than Lone Star, which owns just over half of local bank KEB.

The saga of Lone StarÆs attempts to sell its controlling stake in KEB took a fresh twist recently when it was announced that HSBC had made a formal offer to buy it for $6.3 billion.

Readers will recall that Lone Star was on the verge of selling the stake to Kookmin Bank last year, but that deal fell apart due to an investigation by the public prosecutorÆs office. Investigators were trying to establish that Lone Star had originally purchased its stake in KEB in a fraudulent fashion û and hence had underpaid.

The situation had become a political hot potato in Korea, not least because Lone StarÆs multi-billion dollar profit on the KEB stake was set to avoid any local taxes.

However, after a prolonged investigation, that not only included raids of Lone StarÆs offices in Seoul, but also of those of US bank Citi, the government prosecutorÆs office was unable to find a æsmoking gunÆ. Last December, it ended its investigation, and conspicuous by its absence was any announcement by the prosecutorÆs office of hard evidence of fraud in Lone StarÆs acquisition of the controlling stake in KEB (for which it paid $1.2 billion in 2003).

In spite of this, however, a legal cloud of uncertainty remained as the case was sent up to the Supreme Court.

Six months into 2007, Lone Star adopted a new strategy û to the shock and surprise of Korean bureaucrats û when it sold an 11.3% stake in KEB in the open market, raising $1 billion.

The Korean authorities seemed to have been wrong-footed by this fait accompli, and remained curiously quiet. No statements were made that this share sale was illegal.

It was this that seems to have emboldened Lone Star, and possibly HSBC too. In some ways, the British-based global bank offered the Korean authorities a face-saving end to the KEB saga. No Korean monies would change hands û making it politically less sensitive. And HSBC offered to retain KEBÆs separate listing and brand, much as it has done with its 56%-owned Hang Seng Bank in Hong Kong. HSBC was also a far more popular choice with KEBÆs union than Kookmin û since it promised not to cut jobs. This is a key concern, with Presidential elections coming in December.

In fact, Lone Star may have calculated that the elections offered a rare window of opportunity. It may have suspected that bureaucratic inertia would prevail in the dying days of the Roh administration; hence allowing its deal with HSBC to sail through.

Then, in late August, the Financial Supervisory Service deputy governor Kim Dae-pyung, said that it would not start the approval process for the (then) prospective deal until the Supreme Court had passed its verdict. Without regulatory approval from the FSS, HSBC cannot buy the 51% stake. And no one knows when the Supreme Court will give its verdict.

So why has HSBC now put out a press release announcing a deal has been formalised with Lone Star to acquire the stake û and also buy government-owned KeximÆs 6.25% stake? Is this mere gamesmanship?

It should be noted that near the top of the press release its states that the ôtransaction remains subject to regulatory approvalö. This is not your typical M&A euphemism: the fact is that all the regulatory approvals have not yet been granted.

It is highly unusual for HSBC û which is a very cautious institution û to announce deals when the local regulators have not given their blessing. That makes this situation all the more unusual.

However, HSBC appears to be confident that the approvals û from the Financial Supervisory Commission and the Fair Trade Commission û will come through. Indeed, its press release also states that if the deal does not complete by January 31 then its purchase price will increase by $133 million. This basically amounts to a penalty clause û if HSBC is not able to get all the relevant approvals in fairly short order.

But will it?

The sceptics have a strong case û especially based on the past track record of the Korean authorities. Some analysts and bankers remain convinced Lone StarÆs attempts to sell the controlling stake will be blocked.

Then again, the presidential election in December could be a turning point, depending on its outcome. The current frontrunner in the polls is former Seoul mayor, Lee Myung-bak. Lee, a pro-business candidate, is reckoned to be well aware of the damage to KoreaÆs international reputation û as an investment destination û that the messy KEB debacle has wrought in the past 18 months. If elected, his administration may look to signal a break with past policy. And by lending its support to KEBÆs sale to HSBC it would send a very positive signal to the international investment community.
¬ Haymarket Media Limited. All rights reserved.
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