By Kim Jae-won
Will financial regulators approve Lone Star Funds’ sale of the Korea Exchange Bank (KEB) to Hana Financial Group or delay it?
Either way, the Dallas-based private equity fund, which holds a majority stake in the nation’s sixth largest bank, will have nothing to lose, industry watchers say.
If the Financial Services Commission (FSC) puts on the agenda and approves the KEB sale in its bimonthly meeting today it is certain that Lone Star will welcome the news.
The U.S. fund will be able to take home 4.7 trillion won ($4.2 billion) selling its 51 percent in KEB to Hana.
Lone Star is also waiting to receive about 191 billion won in dividends according to a decision by the KEB board to pay 580 won per share in dividends last week.
Hana should pay an additional 89 billion won to the U.S. buyout firm as guaranteed by Hana.
In the contract Hana agreed to allow Lone Star to receive at least 280 billion won in 2010 yearend dividends from KEB, or 850 won per share.
Lone Star is guaranteed to receive 5 trillion won, more than three times the 1.4 trillion won which Lone Star initially invested to take over the lender in late 2003, when KEB was in financial trouble.
Then, what will happen to Lone Star if the FSC delays the deal? The chance is that the FSC will discuss the matter in the coming months or wait until the high court reconsiders its ruling rejected by the Supreme Court. There is a 50-50 chance that the FSC will delay its decision because any prompt approval will not only subject it to public outcry in the short term but also to legal accountability over the long run.
But it won’t lose anything, either. First of all, the Jonh Grayken-led fund will automatically earn 32.9 billion won in a“punitive” monthly payment from Hana Financial from April, because the two sides agreed to seal the deal by March.
From June, either side may unilaterally call it quits without punitive payment. Lone Star, however, will be able to pocket the deposit made by Hana, which is known to be around 47 billion won, 1 percent of the deal.
The equity fund will be able to receive an additional 900 billion won in KEB’s portion of the sale of Hyundai Engineering & Construction to Hyundai-Kia Automotive Group. Lone Star is also entitled to dividends as majority shareholder of KEB.
Even in the worst-case scenario of the FSC stripping the U.S. fund of its major shareholder status, Lone Star is required to sell 41 percent out of its 51 percent stake in blocs because the banking law bans a major shareholder from owning more than a 10 percent stake in a bank.
Lone Star would lose the premium that comes with the sale of a majority share.
Stock prices may vary but, if KEB share prices are around 9,030 won, Lone Star would receive 2.1 trillion won for the 41 percent stake it will sell.
Lone Star will be able to sell the remaining 10 percent stake with a 10 percent premium because the buyer of the stake would demand representation on the board of directors, and it would see an additional 640.1 billion won.
In this case, Lone Star will take 3 trillion won, 60 percent of the amount it would generate by selling to Hana Financial. In this case, Lone Star can procrastinate with legal wrangling for a couple of years, milking more in the process.
Some financial experts worry that the decision may negatively affect foreign investors and give Korea Inc a bad reputation.
“I’m sure it will be bad news for current and potential international investors. The regulator should keep this in mind,” said a local analyst on condition of anonymity.
Meanwhile, politicians from opposition parties asked the FSC to delay the decision as the legal dispute over Lone Star is not yet complete.
“We have asked the FSC to stop its examination of the deal as the legal process regarding Lone Star is still ongoing,” said 10 lawmakers of four opposition parties.