Setback to Lone Star HSBC terminates deal to buy Korea Exchange Bank

Sep 20, 2008 (Asia Pulse Data Source via COMTEX) -- MS | Quote | Chart | News | PowerRating -- HSBC's decision to pull out of a deal to take over Korea Exchange Bank (KEB) has cast a cloud over the fate of South Korea's fifth largest lender. The move has no doubt dealt a severe setback to the bank's main shareholder, Dallas-based Lone Star Funds, which intends to cash out its investments from the Korean market. The current U.S. financial turbulence and its spillover to global financial markets have negative implications about the future course of action over the KEB sale.

It appears that the U.K.-based HSBC Holdings has made a wise decision to terminate the deal to acquire a 51.02 percent stake in the KEB, considering the U.S. housing loan crisis and global financial woes. HSBC is reportedly paying more attention to the world's giant investment banks, including the troubled Lehman Brothers and Morgan Stanley, which are up for sale. That is, HSBC can buy more attractive financial institutions at cheaper prices.

The decision to pull out of the KEB takeover came one year after HSBC agreed to buy the Seoul-based lender from Lone Star for $6.3 billion. The deal, however, remained deadlocked as South Korea's financial regulators withheld its approval, citing legal disputes over the U.S. buyout fund's 2003 purchase of KEB. A trial is under way over charges that former government officials and an ex-president of KEB colluded to underestimate the bank's financial health in a bid to help Lone Star take over the lender at a much cheaper price than its market value.

The deal between HSBC and Lone Star was signed in September 2007 after the U.S. fund scrapped a November 2006 deal to sell KEB to South Korea's top lender, Kookmin Bank, amid the legal disputes. Now, Lone Star has to start from scratch for the sale of KEB. The fund is faced with more difficulty in disposing of its stake in the lender following the U.S. and global financial firestorm. Market watchers said the deal failed as HSBC asked Lone Star to slash the takeover price. Thus, it might be inevitable for Lone Star to offer to sell KEB at a lower price than the $6.3 billion. This means that the equity fund could sustain a loss from HSBC's withdrawal.

In this regard, the Korean government and its regulators are taking a close look at what action Lone Star will take. It was reported that the fund sent a letter to Korean officials in July, threatening to sue the Seoul government over a delay in approving the deal with HSBC. An expert said Lone Star might claim an estimated loss of roughly $2 billion if it launches a legal battle.

International investors have so far expressed concern about the delayed sale of KEB. But the Korean government has failed to take quick action due to persisting sentiment against foreign capital's foray into local banks and companies. In this situation, local lenders, including Kookmin Bank and Hana Financial Group, are showing interest in acquiring KEB. They are likely to have a good opportunity to buy the bank at a lower price, silencing the anti-foreign capital sentiment among Koreans. But it remains to be seen whether the nation can regain foreign investors' confidence in the local market

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