Lone Star-Hana deal faces last big hurdle

As pressure tactic, US private equity fund looks for alternative buyer of KEB

By Kim Jae-won

The KEB trade union and its umbrella organization, the Korean Finance Industry Union (KFIU), are moving to pressure the Financial Services Commission (FSC), led by Chairman Kim Seok-dong, and the Financial Supervisory Service (FSS), led by Governor Kwon Hyouk-se, to classify Lone Star as a non-financial player, banned from having more than a 4 percent stake in a bank.

The unionists argue that the Texan private equity company is a non-financial investor as it owns a subsidiary titled PGM Holdings in Japan whose total assets exceed 2 trillion won ($1.7 billion), the maximum limitation for financial players in Korea.

“Only the FSC and the FSS deny Lone Star is a non-financial player despite all citizens as well as financial experts knowing that it is,” according to KEB trade union President Kim Kwi-chul and KFIU President Kim Moon-ho in a Saturday statement.

Analysts say the unionists’ increased political power may burden the financial authorities. The KFIU recently joined the main opposition Democratic Unity Party (DUP) and its president is a party council member.

The FSS is currently examining Lone Star’s eligibility as KEB owner, and plans to reach a conclusion by the end of the month.

The FSS governor faced criticism last week as he said that foreign non-financial investors are exempted from the 4-percent stake limit regulation.

The lifelong bureaucrat said that the rule is designed to prohibit domestic non-financial investors from owning a bank and make it a private coffer.

But lawmakers and experts counterattacked, saying Kwon misinterpreted the regulation that sets the bar for both Korean and non-Korean investors.

The financial authority itself ruled that the regulation is also effective for foreign investors in an explanation in the early 2000s.

Critics say if Lone Star is classified as a non-financial investor, its 2003 deal to buy KEB should be deemed illegitimate from the start and the sale should be nullified.

But the financial authorities say that even if Lone Star is found to be a non-financial player, its contract to sell KEB to Hana Financial is not problematic as the private equity fund can dispose of any stake exceeding 4 percent.

The governing Grand National Party (GNP) rejected Saturday the DUP’s suggestion to ask the audit agency to investigate the financial authorities supervising Lone Star.

KEB trade union leader Kim and KFIU President Kim criticized GNP Rep. Huh Tae-yeol, who chairs the National Policy Committee of the National Assembly, which supervises the financial authorities and companies.

“Chairman Huh should clarify why he is on the side of an illegal foreign fund. No reason can justify Huh’s actions, who opposes exposing the truth about Lone Star,” said the two union leaders in the statement.

Hundreds of KEB and KFIU unionists held a sit-in strike Friday at the main office of the GNP in Yeouido, Seoul, pressuring the GNP to accept their requests. The unionists wanted to flex their muscles in front of politicians seeking to keep their seats in the April general elections.

The KFIU is the biggest union group in the finance industry which has tens of thousands of members nationwide.

Consequently, the DUP supports the union and asked its ruling counterpart to ask the Board of Audit and Inspection of Korea (BAI) to launch an investigation against Lone Star.

“Should we just watch Lone Star walk away with a few trillion won of national wealth? I do not understand why the GNP’s Emergency Committee Chairwoman Park Geun-hye does not deal with the Lone Star issue,” said Rep. Jong Bum-goo, a DUP council member, during the council’s Friday meeting.

Lee Tae-ho, an aide of Rep. Huh was not available for comment.

Unionists assume that a private relationship between President Lee Myung-bak and Hana Chairman Kim Seung-yu is behind of the GNP’s objection to a Lone Star probe. Lee and Kim are alumni, having both attended Korea University in the 1960s.

Even some politicians say Cheong Wa Dae is rumored to have pressured the GNP not to investigate Lone Star.

A lawmaker questioned whether it is because Lone Star is related to the Bush family. He said that the Texas-based fund has a close relationship with the Bush family, and asked if it could be the main reason for banning an audit of the fund at the council meeting.

Will Lone Star look for another buyer?

Industry watchers say if the financial regulator’s ruling delays the sale, Lone Star may look to replace Hana in case the deal falls through.

Analysts say that the U.S. buyout fund will likely contact alternatives as Hana’s exclusive negotiating right expired at the end of 2011.

According to the contact, Lone Star can look for new buyers from Jan. 1 as it only has until May 24 to unload at least a 41.02 percent stake in KEB.

Industry watchers say the Australia and New Zealand Banking Group (ANZ) and the Industrial and Commercial Bank of China (ICBC) are two strong candidates.

ANZ was in talks with Lone Star over KEB, and conducted due diligence on the lender in August 2010, but was unable to seal a deal as Hana surprisingly struck an agreement with Lone Star in November 2010.

ICBC, one of the biggest Chinese lenders, seeking to extend its reach to the Korean Peninsula is also attracting attention from markets for its recent engagements within the nation.

The lender has a joint business with KB Financial Group, and is known to have interest in acquiring Kwangju Bank, a regional lender based in the southwestern city of Gwangju in South Jeolla Province.

If the FSC approves Hana’s application by Feb. 22, Lone Star is expected not scrap the deal, and sell its 51.02 percent stake under the previous contract.

In December, Hana agreed with Lone Star to cut the price for KEB by 11 percent to 3.9 trillion won ($3.4 billion), paving the way for the U.S. buyout fund to exit the Korean market.

Lone Star has made profits of around 2.9 trillion won by receiving a series of dividends and selling part of its stake in 2007. Its original investment in KEB was 2.15 trillion won.

Lone Star has drawn strong public criticism as many accuse it of trying to flee Korea after fattening its pockets.