HSBC pays $6.3bn for KEB stake

HSBC, the world’s fourth-largest lender, has signed a contract to buy a 51 per cent stake in Korea Exchange Bank for $6.3bn. The deal, if completed, will catapult HSBC into the top ranks of Asia’s third-largest banking market.

The agreed price is significantly higher than the markets were expecting – discussions were understood to be in the range of $5bn-$5.5bn – and underscores HSBC’s belief that KEB is its last chance to snap up a Korean bank.

However, the deal faces numerous hurdles, not least that the regulator has declared the sale can not take place while court cases involving Lone Star, the current majority owner of KEB, continue.

Under the deal signed on Monday, HSBC offered Won18,400 per share for Lone Star’s 51 per cent stake in KEB, valuing the acquisition at $6.3bn.

The price will rise by Won380 per share, or $133m, if the deal is not completed by January 31 next year, but the whole agreement will expire on April 30 if the sale has not taken place.

HSBC will now commence 40 days of due diligence on KEB, followed by a further five-day period during which time either side can terminate the agreement.

Stephen Green, HSBC group chairman, said: “Our stated strategy is to focus on expanding HSBC’s presence in important growth economies, particularly in Asia, Latin America and the Middle East and to maintain our capital strength to allow us to take advantage of strategic opportunities. This prospective acquisition reflects that strategy.”

The deal would also “reinforce our position as Asia's number one international bank,” Mr Green said.

The sale is based on conditions including regulatory approval from Korea’s Financial Supervisory Commission and the Fair Trade Commission; no adverse changes to KEB; and no deviation in KEB’s agreed management strategies.

However, Kim Dae-pyung, deputy governor of the Financial Supervisory Service, last month said that Lone Star would not be able to sell its controlling stake in KEB until all court cases involving the US private equity fund’s 2003 acquisition of the lender are resolved.

Lone Star was investigated for alleged involvement in artificially lowering the price at which it bought KEB in 2003, but was cleared by the state Board of Audit and Inspection of any wrongdoing. Former KEB and government officials remain under investigation for their role in pricing the 2003 deal.

Lawyers say there is no legal reason the fund should be prohibited from selling its stake in the bank as Lone Star has been cleared. The FSS does not appear to have the ability to block the deal, only to delay regulatory approval, they say.

But the KEB sale remains a highly political issue – ordinary Koreans were shocked that a foreign “vulture fund” will walk away with $4bn in tax-free profits, thanks to a double-taxation treaty between Korea and Belgium, where Lone Star’s investment vehicle is registered.

With presidential elections looming in December, many analysts say the cases will remain on hold until next year.
Source : http://www.ft.com