Hana Bank's Takeover of KEB to Gain Momentum

Financial Services Commission finds Lone Star no longer qualified to hold majority stake in KEB

Hana Financial Group has been put in a good position to take over a majority stake in Korea Exchange Bank, as Lone Star decides not appeal the court ruling that found the U.S. hedge fund guilty of stock price manipulation. Lone Star Funds' decision not to appeal a Seoul court verdict is expected to speed up the U.S. buyout fund's long-stalled plan to sell its controlling stake in Korea Exchange Bank (KEB), clearing legal uncertainties that have blocked the sale, market watchers said on Oct. 13.
Last week, the Seoul High Court found the U.S. buyout firm and its former South Korean unit chief Paul Yoo guilty of manipulating stock prices and imposed fines of 25 billion won ($22 million) and 4.3 billion won, respectively, overturning an acquittal in 2008. Both parties were given a one-week deadline to appeal the verdict.
The decision is expected to expedite a 4.41 trillion won deal between Lone Star and Hana Financial Group Inc., the country's fourth-largest banking group, that has been in legal limbo since the Financial Services Commission (FSC), the country's financial regulator, indefinitely delayed approval, citing the lawsuit over Lone Star's stock manipulation charges in its 2003 purchase of a KEB credit card unit.
"Future schedules will be announced early next week upon a legal review," FSC Chairman Kim Seok-dong told reporters.
Following last week's court ruling, the FSC said it may order Lone Star to sell the bulk of its KEB stake if it fails to meet legal requirements as the lender's major shareholder. "If Lone Star fails to meet the requirements, it will be ordered to sell the stake that exceeds its holding limit," the FSC said in an e-mailed statement, without clarifying the method and timing of any possible stock sale.
Korean law bans an executive or corporate entity from being the majority shareholder of a local bank if convicted of a crime during the last five years. As Lone Star's decision not to appeal the conviction strips the U.S. fund of eligibility to be a major shareholder, market watchers said the financial regulator is set to order Lone Star to sell a 41.02 percent stake in KEB.
According to the law, Lone Star, now convicted, is eligible to own no more than a 10 percent stake in KEB. "If Lone Star gives up on lodging an appeal, the legal uncertainties will be completely repelled. There is no reason for the government to take further time," an FSC official said.
The Financial Services Commission said on Oct.17 that it has informed Lone Star Funds that it should sell its stake in the bank within six months time.
If Lone Star does not appeal within seven days, the fund will be banned from exercising its voting rights for the 41.02 percent stake, the FSC said in a statement.
"(Through several processes,) the FSC will then instruct Lone Star to dispose of the 41.02 percent stake in KEB," it said.
The FSC also said the schedule, including ordering the stake sale has yet to be fixed, adding, "A detailed timetable will be fixed at a panel discussion."
An FSC official said the key issue is whether the financial regulator will specify the method of the stake sale in detail to prevent Lone Star from handing over their KEB shares to a particular investor.
In May, FSC Chairman Kim Seok-dong said it would not be easy to order Lone Star to sell its stake in KEB by directing "concrete" sale terms.
"(Under the scenario of an enforced sale), the FSC is only entitled to set a deadline (for stake disposal)," Kim told reporters at a seminar.
He downplayed speculation that the authorities could ban Lone Star from selling most of its shares to a particular investor such as Hana Financial Group, which made a preliminary contract with the fund to buy KEB shares last November. The FSC delayed the endorsement or rejection process due to the ongoing court trial.
If the FSC simply orders a stake sale, Lone Star may choose to sell the dominant stake to Hana Financial while KEB's stock price stays quite low compared to last November. The fund could also receive payment for a management premium from Hana Financial.
But under the scenario that the FSC instructs Lone Star to sell shares on the stock market to anonymous investors at market-determined prices, Hana Financial could possibly fail to take over KEB.
Another possibility is further postponement of the KEB sale with possible legal countermeasures from Lone Star.
A Seoul court on Oct. 13 found Lone Star Funds and the former chief of its unit guilty of stock-price manipulation,
The Seoul High Court ruled that the Texas-based private equity fund and Paul Yoo rigged stock prices of Korea Exchange Bank's credit card affiliate to help KEB absorb the unit at a lower cost in 2003. Lone Star acquired a majority stake in KEB earlier that year.
Yoo was sentenced to three years in prison and fined 4.3 billion won, while the U.S. buyout fund was fined 25 billion won. KEB, which was indicted on the same stock price manipulation charge, was acquitted. nw

Chairman Kim Seung-yu of Hana Financial Group.

Photo on courtesy of Hana Financial Group