What are consequences of no deal?

FSC’s ‘on-hold’ call to cause investors to raise eyebrows

By Kim Tae-gyu

The Financial Services Commission (FSC) decided to delay a decision on two key issues that stand in the way of Hana Financial Group’s acquisition of the Korea Exchange Bank (KEB) from Lone Star Funds Wednesday.

The points at hand are whether Lone Star legally became the majority stakeholder in KEB and approval for the deal itself.

The FSC’s latest decision came with the markets watching whether the Korean government had been stalling for seven years without acting on Lone Star’s legal qualifications.

It can be taken either as a case of bureaucratic ineptitude, the very tendency that ends up stunting the growth of private enterprises, or a case of public servants’ prudence. Either way, the decision could entail unexpected consequences.

There are four possible scenarios over the future of the Korea Exchange Bank (KEB) as a result of the FSC’s delayed decision.

In the worst-case scenario at least for Hana Financial, the delay may kill the deal to buy KEB for 4.7 trillion won ($4.2 billion) from Lone Star Funds, agreed on in November.

This would mark an abrupt turnaround since approval from the Financial Services Commission (FSC) has been widely expected.

Yet, things changed on March 10 when the Supreme Court overturned a lower court’s ruling over Paul Yoo or Yoo Hoi-won’s alleged false disclosure to manipulate stock prices of KEB’s credit card unit in 2003 to deflate its acquisition prices.

As a result Yoo, an erstwhile head of Lone Star’s unit here, is to face a protracted court battle.

If he is eventually found guilty, Lone Star would be not eligible as the single-largest shareholder of KEB as the relevant law stipulates an entity found guilty of a financial crime in the previous five years cannot hold a major stake in a financial company.

Obviously affected by this verdict, the FSC delayed a decision on whether Lone Star was eligible to become the biggest shareholder of KEB. It did not even discuss the approval of the Hana-Lone Star deal.

Doubts are springing up that the sale of KEB will not go ahead because both Hana Financial and Lone Star can walk away if it is not completed by May.

Market observers say the two most significant factors are the court verdict and the decision of the FSC.

The former would take time with Lone Star possibly resorting to a petition to the Constitutional Court. Accordingly, the FSC is likely to play a key role with regard to the KEB’s future.

All four scenarios center around the decisions of the FSC: Is Lone Star an eligible shareholder of KEB and will it give the green light to the Hana-Lone Star deal?

Eligible, hence ok the deal

The FSC seems to think there were no problems in Lone Star taking over KEB in 2003.

Critics have claimed that the Texan private equity fund is a non-financial company, which is not allowed to snap up banks under Korean law. But the FSC said this was not the case.

Excluding the lingering legal disputes, FSC standing commissioner Choi Jong-ku told reporters after the FSC meeting that Lone Star is allowed to own KEB.

After reviewing various legal claims, the FSC may conclude that Lone Star is eligible to own KEB. Then it will be able to approve the Hana-Lone Star contract.

Yet the FSC will have to consider that its measures might conflict with those of the courts.

Not eligible, hence scrap the deal

Should the FSC deny Lone Star’s eligibility and refuse to endorse the sale, the contract will be scrapped. This would be the worst-case scenario for Lone Star as it might have to sell off its 51-percent stakes at market prices.

Then the fund would receive in the neighborhood of 3 trillion won instead of 4.7 trillion won as agreed with Hana, the price including the so-called management right premium.

This is what the trade union contends is the right solution.

``The gist of the highest court’s ruling is that Lone Star is not eligible as the largest KEB shareholder. Subsequently, the FSC is required to follow it,’’ KEB trade union spokesman Kim Bo-heon said.

``Along the same lines, the Hana-Lone Star contract should be jettisoned. Then, Lone Star should sell the shares at market prices.’’

Not eligible, but ok the deal

If an entity is classified as ineligible as the shareholder of a bank, it has to offload its stock.

Some argue that the FSC may be able to find a solution in denying Lone Star’s eligibility while approving the KEB deal, which would still lead Lone Star to sell off its shares.

The KEB trade union has vowed to go on strike if the FSC approves the deal. It already held union ballots where 96 percent of its members voted for walkouts.

``If the eligibility of the largest shareholder is denied, it means that Lone Star is not supposed to manage KEB. So, it has to be deprived of management right premium in disposing of its shares,’’ Kim said.

``It can take only the market prices for its stocks. Otherwise, the FSC will come under criticism that it has given special treatment to Hana since its head is close to President Lee Myung-bak.’’

Hana Financial Group Chairman Kim Seung-yu is a long-time friend of President Lee. Both studied business administration together at Korea University.

No decision

The final possibility is that the FSC will not draw any conclusions on either issue. The regulator might say that it plans to wait for the final court ruling no matter how long it takes.

Then, the KEB deal is unlikely to go ahead since the chances are that both Hana and Lone Star would not wait indefinitely.

Those involved in the contract would not be happy with this scenario as conventional beliefs show that ``The worst decision is not to make any decision on immediate topics.’’

But this is somewhat implausible in consideration of the FSC leadership. Its Chairman Kim Seok-dong tends not to take a wait-and-see approach when he has a significant task.