Lone Star ordered to sell KEB stake
Hana likely to take over stake with no conditions attached
By Kim Jae-won
The financial authorities ordered Lone Star Funds to sell its majority stake in Korea Exchange Bank (KEB) within the next sixth months, Friday.
This will pave the way for Hana Financial Group to take over its domestic rival in the one of the biggest merger and acquisition (M&A) deals executed in the Korean financial industry. The Texas-based buyout fund, which had been struggling to sell its majority stake in KEB and punch a ticket out of Korea for years, couldn’t be happier to be kicked out.
After a much-anticipated meeting, the nine-member executive panel of the Financial Services Commission (FSC) said Lone Star should reduce its 51.02 percent stake in KEB to below 10 percent by mid-May.
While it has been widely expected that the financial regulator would issue a sales order, there have been debate on whether they should allow Lone Star to sell its stake unconditionally or impose punitive terms.
Refusing to attach any penalty to the sales order, the FSC resisted pressure from politicians and KEB unionists, who have been arguing that the regulator should order Lone Star to dispose of its stake in the stock market and prevent it from earning a premium on its holdings.
``We decided to order Lone Star to sell a 41.02 percent stake in KEB in six months. We reached this conclusion, based on legal consultations and precedents,’’ said FSC Commissioner Lee Suk-jun.
Last month, Lone Star opted not to challenge the Seoul High Court’s ruling that convicted the company and the former head of its Korean operations, Paul Yoo, of manipulating the stock prices of KEB’s credit card unit in 2003 to help its merger with the bank.
With the FSC decision, Lone Star has cleared the last hurdle in its six-year quest to offload its 51.02 percent stake in KEB and clinch its long-awaited exit from Korea. Under Korean law, firms that have been convicted of a crime in the previous five years aren’t allowed to own more than 10 percent of a financial company, a rule that Lone Star was willing to embrace as a backhanded ticket out of Korea.
Lone Star signed a $4 billion-plus agreement to sell its 51.02 percent stake in KEB to Hana late last year. But the deal stalled as the FSC chose to wait for the results of the retrial at the high court after the Supreme Court overturned a 2008 not-guilty verdict in March.
This forced Lone Star and Hana to extend their deadline from May to Nov. 30 on a price tag of 4.41 trillion won (about $3.9 billion). It bears further watching whether the FSC’s sales order ensures that the new deadline will be met.
The two sides had been under pressure to agree on a new price as share prices of KEB plunged sharply due to the volatile economic situation.
The FSC is expected to face backlash from KEB unionists and lawmakers who have questioned the regulators’ evaluation of Lone Star as a financial investor despite its large proportion of non-financial assets. Under Korean law, non-financial investors aren’t allowed to own more than 4 percent of a bank. Critics have also demanded that the regulator take punitive action against Lone Star, such as ordering a public stake sale.
KEB unionists said they may go for collective action should the FSC decide to issue a non-punitive sale order without assessing Lone Star's eligibility as a financial investor. Hundreds of KEB unionists demonstrated in front of the FSC ahead of the meeting to demand that punitive measures be imposed on the Texas fund.
In 2003, Lone Star bought a 51 percent stake in KEB and 14.1 percent more from the bank through Germany's Commerzbank and the state-run Export-Import Bank of Korea in 2006 for a combined 2.15 trillion won before offloading the remainder via block sales later.
Lone Star previously attempted to sell its KEB stake and leave the country after first purchasing KEB shares in 2003, but negotiations with Kookmin Bank in 2006 and HSBC in 2008 fell through due to regulatory issues and the global financial crisis.