By Kim Jae-kyoung
Staff Reporter

Lone Star Funds has suspended its efforts to find a potential buyer to sell off its controlling stake in Korea Exchange Bank (KEB) to in the wake of the deepening credit crunch.

As a consequence, the long-stalled sale of the nation's fifth largest lender looks to have been further deadlocked, which will hamper President Lee Myung-bank's efforts to attract more foreign investors to tide over the current economic turmoil.

``With the credit crunch deepening, Lone Star recently halted its move to find a potential buyer,'' a person close to the U.S. buyout fund told The Korea Times, asking not to be named.

``The fund believes that it is impossible to sell the Korean lender at a fair price right now due to a plunge in KEB share prices,'' he added. ``I think the sale is unlikely to take place for at least for one year.''

Lone Star has been fishing for a potential buyer both at home and abroad after its attempt to sell off its 51.02 percent stake in KEB to HSBC ended in a failure as a result of the global financial meltdown.

However, the source doesn't rule out the possibility that Lone Star will come back to the negotiation table once a potential buyer appears. ``If Kookmin Bank, for example, offers a fair takeover price, the Texas-based fund will probably resume talks,'' he said.

Following the rupture of the sale of KEB to HSBC in September, Lone Star appointed Credit Suisse as a lead manager for the KEB sale and it had been looking for a new strategic, major shareholder for the lender. In October, KEB set up a shareholder transition task force reporting directly to CEO Richard Wacker.

Battered by a deepening liquidity crisis, KEB stock prices have nose-dived since the failure of its sale to HSBC ― it closed at 7,050 won per share Friday, down from 11,350 won Sept. 19 when HSBC terminated the deal.

``Given that Lone Star rejected the call from HSBC to reduce the sale price to 12,000 won per share, the fund is unlikely to sell off the bank at below 10,000 won. But it won't be easy to find a potential buyer at that price at this moment,'' a market analyst said.

In addition, the merger and acquisitions (M&A) market has suddenly turned into a ``buyer's market,'' as many ailing businesses are being put up for sale at low prices.

Worsening financial soundness at local banks is making the sale more difficult. Kookmin, the flagship of KB Financial Group, and Hana Bank, which once showed strong interest in a takeover, are now struggling to fix their balance sheets.

``It is very difficult for KB Financial to take over KEB at this moment,'' KB Financial Group Chairman Hwang Young-key said during his New Year's address.

``There is no reason that we exclude KEB from our potential M&A target, but chances are very low right now as there is a dollar shortage here,'' he added.

Lone Star, led by chairman John Grayken, is carefully considering suing the Korean government in the face of mounting complaints from investors who are angry with the delay in cashing out their KEB investment.

``Chairman Grayken has been pressed to leave the top position because of the long-stalled sale of Lone Star. No decision has yet been made but the private equity fund is mulling over taking the government to court for potential losses incurred by the delay of the sale,'' the source said.

A private equity fund, generally, makes an investment over a two to three-year time frame, but five years have now passed since Lone Star acquired KEB.

In the meantime, in November, a Seoul court ruled that the sale of KEB to Lone Star in 2003 was not illegal as it was unavoidable at that time to prevent the then troubled bank from going bankrupt and burdening the economy.

The court ruling cleared Lone Star of all legal disputes that have stood in the way of selling off the nation's fifth largest lender. Earlier in June, the court also cleared Lone Star Korea Head Yoo Hoe-won of charges of manipulating the stock price of KEB Card.

kjk@koreatimes.co.kr