Will another private equity take over KEB?

Only a couple of bidders making serious pursuit of Korea’s 5th biggest bank

By Kim Jae-kyoung

Staff reporter

Lone Star Funds Chairman John Grayken may feel uneasy about the latest development in the negotiations for the sale of Korea Exchange Bank (KEB) as it is unfolding in a way that he would prefer to avoid.

Despite its efforts to attract many strategic investors both at home and abroad, only one private equity fund has submitted a letter of intent (LOI) to purchase a 51.02 percent controlling stake in the bank.

Grayken is facing double dilemma. He has been pressed to step down due to the delay of the sale. He had persuaded investors to wait until the global financial market fully recovered to maximize returns. However, it doesn't seem like this scenario will happen, with few investors showing interest in KEB despite the relative recovery of the market.

"Among three potential bidders ― MBK Partners, Standard Chartered (SC) and Australia and New Zealand Banking (ANZ) Group, only MBK submitted a LOI and became the sole bidder," a source close to the matter told The Korea Times, asking not to be named.

"MBK has been most keen to take over KEB by forming a consortium with strategic investors. SC and ANZ did not submit LOIs as they had failed to narrow differences in the valuation gap," he added. "Lone Star wants more than 4.5 trillion won, while SC and ANZ estimate the value of KEB to be around 3 to 4 trillion won."

KEB shares closed at 13,200 won per share Tuesday. Given that the fund owns 329.04 million shares, the sales price is estimated to be around 4.3 trillion won ($3.7 billion). But the fund wants a premium on managerial rights.

MBK, headed by Micheal B. Kim, who was chairman of the Carlyle Group Korea, is now trying to form a consortium by finding investors both at home and abroad. It has been in talks for a joint bid with Japan's Nomura Holdings, the source said. MBK Partners is the largest private equity fund in Korea with a 1 trillion won capital base.

Credit Suisse, the lead manager for the sale, had a briefing session for the Seoul-based private equity about details of KEB from Monday to Tuesday. But both Credit Suisse and MBK were not available for comments on the progress of the sale.

Few options for Grayken

Now Grayken has two options ― pushing for negotiation with MBK to sell it at a reduced price or wait again until another potential bidder turns up among local banks. But either option seems not in favor of Lone Star.

"Since Lone Star may be unable to sell KEB at its target price if MBK joins the bidding process as the sole bidder, it is likely that Lone Star will further delay the bidding process for local banks' participation," a market analyst said.

But given that a few major Korean lenders are also up for sale, Lone Star is not likely to find Korean bidders anytime soon. Lone Star's attempt is taking place simultaneously with a government bid to transfer a controlling stake in the state-funded Woori Financial Group, which analysts say will make it even more difficult for the fund to find a buyer.

Most importantly, following his nomination a week ago, Euh Yoon-dae, nominee for the chairman of KB Financial Group, said that he would be more interested in taking over Woori rather than KEB.

"The most important thing is to secure management efficiency and business diversification. In this regard, it would be better to take over Woori. There is no Korean bank with the financial capability to purchase KEB. That's why only foreign banks, such as AZN, showed interest," he said.

Lone Star had expected KB to join the bidding race once the new KB chairman was appointed because the former KB Chairman Hwang Young-key and Kookmin Bank CEO Kang Chung-won were keen to acquire the lender.

Concerns over private equity

With MBK becoming the sole bidder for KEB, the sales process is expected to gain momentum but concerns are also growing that if KEB is purchased by another private equity fund, it will undermine the corporate value of the foreign exchange-focused bank.

A private equity fund, generally, makes an investment over a two to three-year time frame, but seven years have now passed since Lone Star acquired KEB. A private equity can play a positive role in restructuring troubled firms but if it controls a firm beyond the time frame, it can hurt the firm's corporate value as its priority is to maximize return, not to improve its corporate value.

``KEB used to be a very attractive bank but it is not what it was three years ago when HSBC tried to buy it. Its corporate value has been diminishing as the fund reduced investment while using most of its earnings surplus for dividend payouts for its shareholders,'' a local bank executive said on condition of anonymity.

Most recently, KEB decided not to allow new shareholders after June 30, a move that market analysts believe is aimed at protecting the interest of controlling stakeholder, Lone Star, while bank officials say that it is aimed at bringing down the share price of the bank so as to expedite the sale of its stake.

The fund received around 160 billion won in dividends from KEB in March this year. Together with dividend income in 2007, 2008, 2009 and the sale of KEB stocks, Lone Star has retrieved about 2 trillion won, which is equal to 95.1 percent of its 2.15 trillion won investment in the bank.

"Given that a private equity seeks to maximize returns, chances are that the corporate value of KEB will further diminish if MBK takes over KEB," the bank executive said. "In addition, even if the two agree on the sale of KEB, it is not clear whether the government will give it the green light as it has been under criticism that that it sold off KEB to Lone Star at a giveaway price."

"I doubt about whether the government will approve another private equity fund's takeover of KEB. Since MBK is a private equity pursuing capital gains, it is highly probable that MBK will sell KEB again in a few years, which will further undermine the corporate value of the lender," Kium Securities analyst Suh Young-soo said.

The financial regulator refused to comment on the issue.

"I haven't received any official report about MBK's bid for KEB. It is not appropriate to make a comment on a deal that is underway," said Koh Seung-beom, director general of the financial services bureau at the Financial Services Commission.

Mixed reactions from KEB

KEB has showed mixed reaction over MBK's bid to purchase the lender.

"We think it would not be the best scenario for another private equity to take over KEB. Our preference is a strategic investor or a foreign bank," a KEB spokesperson said.

"However, if a private equity fund and a strategic investor team up to acquire us, there is no reason we will oppose it," he added.

Some analysts said that for KEB, MBK could be a good option.

"I think that for KEB and its employees, MBK is not a bad option because it can maintain its name and identity after the merger," a global consulting firm executive said, asking not to be identified.

In early April, the U.S. buyout fund resumed its efforts to sell KEB, the fund's third attempt to exit from the Korean market by disposing of its stake in KEB.

The resumption came nearly a year-and-a-half after HSBC revoked its $6.3 billion bid for the deal as the financial market crashed following the global financial turmoil triggered by the U.S. subprime mortgage meltdown.