By Kim Jae-won
Lone Star, the Texas-based buyout fund, has been jeered and booed for buying Korea Exchange Bank (KEB) at dirt cheap prices and siphoning off huge dividends.
The blame is being tossed about as Korean regulators repeatedly delayed their approval of its KEB controlling stake when Lone Star gains a hefty dividend from KEB’s stake in Hyundai Engineering and Construction (HE&C).
As a matter of fact, some analysts point their finger at the regulators for their innate inclination to err on the side of caution, although it didn’t mean a newly-found affection for the buyout fund.
“I cannot understand why the financial authorities just sit back and watch what Lone Star is doing,” said Kim Joon-hwan, a professor at Yuhan University.
“The Financial Services Commission (FSC) should have banned Lone Star to take away the excessive dividends from KEB. If the FSC cannot do that, for what does it exist?”
On Friday, KEB’s board decided to pay out a quarterly dividend worth of 1,510 won ($1.42) per share, enabling the U.S. private equity fund, which owns a 51 percent stake in the lender, to collect dividends worth 496.9 billion won ($466 million).
Critics claim that the FSC, which repeatedly suspended its decision on Lone Star’s eligibility as a majority shareholder in KEB, provided a chance for the Texan private equity company to take home “excessive” dividends.
The FSC deferred to make a decision until Lone Star’s legal dispute is resolved. The company’s former head of Korean unit was accused of being involved in stock price manipulation of KEB’s credit card unit in 2003.
The KEB union also criticized the FSC for overlooking the U.S.-based private equity company to take assets of KEB outside of the country, and called for limiting Lone Star’s managerial rights.
According to sources, the dividends of 500 billion won was made from the operations ended at the end of last year and doesn’t entail the sale proceeds of Hyundai Engineering and Construction (HE&C) to Hyundai Motor Group in April.
KEB has received 900 billion won from the sale of its HE&C stake, thereby entitling another heft dividend payment for the next quarter; although sources claimed this is a remote possibility.
KEB declined to comment on the matter of its major shareholder Lone Star, saying that its CEO is the only registered boardroom member who has the exact information.
Despite critics’ claims that Lone Star is skimming profits from its KEB investment and making it hollow in its core competencies, even a senior regulator who has been involved in the decision to delay an approval on Lone Star’s exit said, “Lone Star could have made a lot more from its investment,” citing high returns for high risks.
Industry watchers expect that KEB may take more profits from dividends as it plans to sell its 3.4 percent stake in Hynix Semiconductor in the second half of this year.
Lone Star has recouped profits of around 2.9 trillion won by receiving yearly and quarterly dividends and selling part of its controlling stake in 2007, topping its original 2.15 trillion won investment of the KEB takeover in 2003.
The Dallas-based private equity company’s receipt of massive dividends has sparked strong public criticism that the fund is trying to exit from the Korean market after fattening its pockets while turning a blind eye on a long-term growth plan for KEB.
KEB’s average dividend propensity based on the recent five years beats all its industry rivals, according to data compiled by FnGuide, a financial information provider.
The lender’s propensity to pay out dividends out of its net profits was tallied at an average of 45.35 percent between 2006 and 2010, sharply higher than an average of 15.84 percent calculated based on four banking groups and two local banks, according to the data.
It is troubling that the dividends came as KEB’s market share and earnings have been sluggish, market watchers noted. In the first quarter, the bank’s earnings tumbled 46.4 percent from a year earlier to 198.6 billion won.
The dividend payout came as Hana Financial is seeking to extend a deal to buy a 51.02 percent stake in KEB from Lone Star but the effort is in trouble as the result of the regulator’s decision to delay its approval on the deal.