Will Third Time Be the Charm for Grayken?

KEB Sale Faces Similar Problems to Those in Prior 2 Tries

By Kim Jae-kyoung

Staff Reporter

Lone Star Funds is facing a bumpy road ahead in its move to sell off its controlling 51.02 percent stake in the Korea Exchange Bank (KEB), as it is suddenly turning into a buyer's market with potential bidders showing lukewarm attitudes toward the once most popular M&A target.

In addition, its 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.

In early April, the U.S. buyout fund resumed its efforts to sell KEB by sending out ``teaser'' letters and confidentiality agreements (CA) to six local financial groups and 50 foreign firms to notify them of the sale of the nation's fifth-largest lender.

The resumption of the bank sale 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.

``We have sent out teaser letters to potential bidders both at home and abroad, which we believe have financial capabilities to buy KEB,'' a New York-based source close to Lone Star told The Korea Times, asking not to be named.

``The six local financial groups are KB Financial, Shinhan Financial, Hana Financial, Korea Development Bank (KDB), Mirae Asset Financial Group and MBK Partners. HSBC, Standard Chartered (SC), Development Bank of Singapore (DBS) and Australia and New Zealand Banking (ANZ) Group are among 50 foreign firms.''

However, most Korean firms, including KB, Shinhan and Hana, have yet to send back CAs. If they don't agree on the CAs, they cannot join the bidding process. Only those submitting CAs will be able to receive information memorandum (IM) and participate in the bidding process.

According to the source, Credit Swisse, the lead manager for the sale, is scheduled to send out information memorandum (IM) to those submitting CAs by the end of this week. IM includes the specific timeline of the bidding process and details of the lender showing its current state.

The source said that the actual bidding process will begin in mid-May. It will receive letters of intent (LOI) from potential bidders in the second week of May and make a shortlist for two weeks. Then it will announce a proffered bidder and enter into final negotiations in early June at the latest.

Valuation Gap

Lone Star's move comes as the global financial market has shown signs of rebounding and a series of recent court rulings cleared the fund of all legal disputes that have stood in the way of selling off KEB.

In November 2009, 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.

However, the Texas-based fund might have difficulty finding an investor under its timeline as local financial groups are not as eager to buy KEB as before. Even KB and Hana, which had been keen to buy KEB, are now demonstrating a wait-and-see attitude, citing a valuation gap.

They said that there are two key reasons behind the shift in their attitude ― the valuation gap and the deteriorating corporate value of KEB.

``The key issue is price. While potential buyers estimate KEB's corporate value at around 4 trillion won, Lone Star wants to sell KEB at around 6 trillion won, the price similar to the one HSBC agreed to take it over for in 2007,'' a local bank CEO said, asking not to be named.

KEB shares closed at 13,800 won per share Tuesday. Given that the fund owns 329.04 million shares, the sales price is estimated at around 4.5 trillion won ($4 billion). But the fund wants a premium on managerial rights.

``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,'' he added.

The source said that Lone Star still wants to sell KEB at no less than 18,045 won per share, the takeover price agreed between HSBC and Lone Star. ``The bottom line is around 15,000 won, KEB's share price when the two signed the M&A deal,'' he said.

Market participants said that KEB's corporate value has been falling over the past three years despite its impressive financial balance sheets.

KEB saw its net income grow by 13.9 percent last year while the rest of the industry suffered from the global crisis. It marked 891.7 billion in net income in 2009, with 306.4 billion won made in the fourth quarter.

``If you look at just the numbers, KEB seemed to stay on a good footing. But you have to see how they achieved it. For example, the lender's last year handsome performance was due largely to one-off factors, such as proceeds from the sale of Hyundai Engineering and Construction shares and a tax refund from the 2004 merger with KEB Credit Service,'' an executive of another commercial bank said.

``Also, compared to other lenders, KEB has been paying out too much in dividends to its shareholders, which means that it has allocated less money for future investment. These factors have combined to affect KEB's corporate value,'' he added.

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.

From 2007 to 2010, the U.S. buyout fund earned combined dividend earnings of 856 billion won. Additionally, in June 2007, Lone Star disposed of a 13.6 percent stake in KEB, retrieving 1.2 trillion won.

Shift in Seoul Stance

Despite local firms' lukewarm stance, Lone Star expects to find a buyer within its timeline as a Seoul regulator has shown signs of a shift in its stance toward foreign investors. Before the global crisis, many Seoul policymakers said that it would not be desirable for KEB to be in the hands of foreign investors.

But the global financial crisis changed their view.

``Before the global crisis, we were worried that a takeover of KEB by any foreign firm could pose a threat to the domestic banking industry. But now we don't see them as a threat because the crisis exposed their weakness,'' a top-ranking official at the Financial Services Commission said on condition of anonymity.

``In addition, we can avoid disputes regarding the outflow of national wealth in the case that a foreign player buys KEB. Now nationality of the capital doesn't matter,'' he added.

This is the fund's third attempt to exit from the Korean market by disposing of its stake in KEB. Given that Lone Star Chairman John Grayken has been pressed to step down due to the delay of the sale, the fund is expected to make all-out efforts to sell it off this time.

However, it seems that the odds are not in favor of Grayken. Now he has two options. If he wants to sell it off within its timeline, he should cut the target price. Otherwise, he could have to wait a long time to exit from the country.