By Kim Jae-won
Lone Star Funds has tried without success to sell its controlling stake in Korea Exchange Bank (KEB) on at least two occasions.
Questions about whether the Texas-based private equity company status as the major shareholder were legal, disputes in local courts, and the regulators’ uncertain stance are attributable to these failed sale attempts.
Lone Star's previous two sale deals with Kookmin Bank in 2006 and HSBC in 2008 failed due to regulatory issues and the global financial crisis, respectively. The Dallas-based buyout fund struck the third deal with Hana Financial Group last November, but the future of the agreement is also unclear as the financial regulator has delayed its approval.
KEB was established as a state-run specialized foreign exchange bank in January 1967. In December 1989, it was allowed to become a commercial lender; and was listed on the Korea Stock Exchange in April 1994.
But, KEB suffered from financial difficulties, including low capital adequacy ratio, during the 1997-98 Asian financial crisis. To solve the problem, KEB looked for foreign investment, and Germany-based Commerzbank became a major shareholder of the lender injecting 350 billion won into it in July 1998.
This worked well for a few years, but the credit card crisis hit the lender in 2002. Amid the crisis, Lone Star became the major shareholder in August 2003 buying a 51 percent stake for 1.3 trillion won.
After the lender was brought back on track in 2005, the U.S. buyout fund tried to sell its stake. Lone Star chose Kookmin Bank, the biggest local lender by assets, as the preferred investor in March 2006, and signed a share purchase agreement two months later.
But, investigations opened over allegations that Lone Star was able to buy KEB at a fire-sale price halted the sale as the government regulator referred the legal dispute to the appropriate authorities.
KEB union’s aggressive opposition to the deal also contributed to the breakdown.
In 2007, the London-based global banking giant HSBC tried to buy KEB seeking to expand its presence here. Lone Star and HSBC struck the share-purchase agreement in September 2007, and KEB labor union also welcomed the deal.
But, this time the Financial Services Commission (FSC) delayed it, citing the legal uncertainties. HSBC walked away from the deal in September 2008 due to the global financial crisis and delayed regulatory approval.
Two years later in August 2010, Australian and New Zealand Banking Group (ANZ) conducted due diligence on KEB in Seoul. The Melbourne-based lender showed big interest in KEB in a step to expand its business in Asia, but could not agree with Lone Star over the price.
Finally, Hana Financial struck a 4.7 trillion won deal with Lone Star in late November, but now awaits regulatory approval that at first seemed a formality. But, the Supreme Court overturned a lower court’s not-guilty decision on the former head of Lone Star’s local unit. The FSC again delayed the deal referring to the highest court’s ruling, and said it will examine the legal issues once more.