John Grayken Lone Star Chairman

By Kim Jae-kyoung
Staff Reporter

Lone Star, the largest shareholder of Korea Exchange Bank (KEB), is seriously considering suing the Korean government if it delays approval for a deal on the sale of the fund's shares in the bank beyond September.

The move came as the U.S. buyout fund, headed by Chairman John Grayken, is facing increasing complaints from investors due to the delay of its plan to sell Korea's fifth largest lender to HSBC.

Last September, HSBC agreed to buy a controlling 51.02 percent stake in KEB for 5.9 trillion won from Lone Star, but the deal has been deadlocked as the financial regulator is withholding approval, citing legal uncertainties over the U.S. fund's takeover in 2003.

``Beleaguered with growing complaints from investors, Lone Star is considering returning its KEB shares in-kind to investors as one possible option, together with a block sale option,'' a person close to the deal told The Korea Times, Thursday, on the condition of anonymity.

He said Lone Star investors were very angry with the delay in cashing out their KEB investment. A private equity fund, generally, makes an investment with a two to three-year time frame but five years has now passed since Lone Star acquired KEB.

``Investors have urged Lone Star to speed up the KEB sale, and recently demanded the fund return its KEB shares or conduct a block sale if the deal is delayed beyond September due to legal problems,'' he said, adding that Lone Star had received approval from the investors on the matter

``In either case, Lone Star plans to file a lawsuit against the Korean government for losses incurred by a delay in the sale of KEB,'' he said.

``Considering international judicial precedents, chances are that the buyout fund will win.'

``Lone Star investors have already enjoyed a large profit from investment in Korea. Since they believe that there are many investment opportunities in the U.S., they are pressing the buyout fund to dispose of its KEB shares even if the deal with HSBC falls through,'' he said.

If Lone Star either returns its KEB shares to investors or carries out a block sale, the Texas-based fund, whatever option it chooses, would give up the managerial rights premium, which is worth 1.2 trillion won, around 23 percent of the agreed-upon sales price of 5.9 trillion won. The litigation amount may exceed 2 trillion won, sources said.

Earlier in July, Lone Star sent Financial Services Commission (FSC) Chairman Jun Kwang-woo a letter saying that it will file a lawsuit against the government for losses if the approval is delayed further.

However, Insight Communications, a Seoul-based PR agency for the Texas-based fund, refused to comment on the matter.

According to another informed source, Lone Star set the end of September as the bottom line. Under the agreement in April, the end-of-July deadline was extended to the end of September as the U.S. fund and HSBC took the regulator's action in late August as a move to give approval for the deal, the source said.

In late August, the FSC announced that it would begin a regulatory review of the deal, a turnaround from the regulator's earlier cautious stance.

Given that commission is unlikely to give a green light to the deal by the end of September, it is probable that the buyout fund will opt for one of its alternatives and take the Korean government to court.

In a phone interview with The Korea Times, Kim Gwang-soo, an FSC director general of the financial services bureau, said that it will take at least two months to make a final decision on the KEB sale.

``In addition to Lone Star's legitimacy as a major shareholder of KEB, we will also have to deal with the process of giving a regulatory review of the sales deal,'' he said.

``It is unlikely that a final decision will be made before October because we have to go through lengthy regulatory procedures in order to give final approval for the deal,'' he added.

The ranking regulator denied the possibility of ordering Lone Star to unload part of its stake in KEB for failing to submit documents necessary for the commission to determine whether Lone Star was the legitimate major shareholder of KEB.

The FSC has been reviewing whether the company was ``fit and proper'' as the major shareholder of KEB. But the buyout fund has yet to turn in required documents by an end-of-August deadline, and the FSC is considering levying a fine against Lone Star.

Under banking laws, those who invest over 25 percent of their capital in non-financial firms or those whose assets in such firms exceed 2.5 trillion won are not allowed to own up to 10 percent of a bank as they are classified as a non-financially focused company.

If the FSC rules that Lone Star is a non-financially focused firm, it will have to reduce its holdings in KEB to less than 4 percent.

A court ruling on the Lone Star takeover in 2003, meanwhile, is expected by the end of this month at the earliest. The buyout fund is also waiting for a Supreme Court ruling on the alleged KEB Card stock price manipulation case, which is expected this month.

KEB shares closed at 13,750 won per share Thursday, compared to 18,045 won, the purchasing price per share agreed between HSBC and Lone Star to buy the Korean lender on Sept. 3 last year.

kjk@koreatimes.co.kr