One step forward in Korea

In June, the Seoul Appellate Court acquitted Paul Yoo, the former head of Korean operations for the Dallas-based private equity firm Lone Star Funds, from stock price manipulation charges related to the acquisition of the Korea Exchange Bank (KEB).

However, regulators continue to delay approval for Lone Star's sale of its KEB stake to HSBC, citing other outstanding legal issues pertaining to the firm's acquisition of the bank. HBSC already signed one extension of its KEB offer, set to expire at the end of July. Few observers expect a decision by that deadline, or an additional extension by HSBC, though Kookmin Bank may be waiting in the wings to make a bid of its own.

After the acquittal, the Financial Services Commission (FSC) reiterated its position that it awaits resolution of all legal matters before reviewing the HSBC bid. “Although Lone Star was cleared of rigging share prices related to its purchase of the KEB's credit card unit, the legal process is still going on,” the FSC said in a statement. The regulator added that, “Under this situation, it is not proper for the FSC to continue its regulatory process related to the KEB sale.”

The legal issues yet to be decided include Korean prosecutors' appeal to the Supreme Court to reinstate the conviction of Yoo, along with its five-year prison sentence. A second criminal case is pending, which charges collusion between KEB and senior financial officials to overstate the financial woes of the bank, thereby depressing the sale price. Both cases are unlikely to be resolved before HSBC's latest extension expires.

The bank's original offer of $6.3 billion for a 51.1 percent stake in KEB expired on April 30th of this year, but HSBC agreed to extend its offer until the end of July, pending regulatory approval. In late May, the Financial Times reported that HSBC may be looking to walk away from the deal if regulatory approval doesn't arrive in weeks. This position was reiterated in mid-June when Sandy Flockhart, the CEO of HSBC Asia, spoke with foreign media in Taipei. “It's an acquisition we would like to complete, but it's up to regulatory approval,” Flockhart said, according to a report from Reuters. “If nothing happens, we'll find ourselves in a position to pull out. The board will have to consider that position.”

Richard Wacker, KEB's CEO, told Yonhap News that he hopes HSBC will extend its offer again, because they believe the offer is the right one for the bank. Wacker has called for a regulatory decision, saying at a recent conference in July, “Both sides had a chance to terminate the deal. You saw that they did not do that. That's a sign, despite some difficulties, that they are committed to having this deal get closed,” said Wacker. He also stressed that such delays harm the country's image when the government is focusing on economic development.

The current president, Lee Myung-bak, won last year's election with a platform that made economic reforms a priority. Over the past several months, the FSC has sent mixed signals on the situation, promising a “smooth and quick resolution” to the deal at one point, only to later stress the need to respect public sentiment against foreign investors. Should those mixed signals continue, and HSBC walks away from the transaction, Kookmin Bank, the Korean retail lender, may step in with an offer for KEB.

The Maeil Business Newspaper cited unidentified regulatory and financial officials who said that Kookmin has contacted Lone Star about acquiring its stake in the bank. The sources said that Kookmin may make a public tender offer for KEB, assuming the bid by HSBC falls apart. This would be the second attempt by Kookmin to acquire KEB, having offered $7.3 billion in 2006 until the deal fell apart amid regulatory uncertainties. Whether the second time will prove to be the charm remains to be seen, but some analysts still expect other buyers to line up for KEB. Park Jung-hyun, an analyst at Hanwha Securities, told Reuters, ““If the deal indeed falls apart, Lone Start will have to find yet another buyer, which I think will likely to be either Kookmin or Hana Financial Group.”