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Will HSBC and Lone Star Scrap KEB Deal?

Posted by: Ihlwan Moon on June 24, 2008

U.S. buyout fund Lone Star’s $6 billion deal to sell its 51% stake in Korea Exchange Bank (KEB) to HSBC could collapse unless they agree to extend a deadline for obtaining regulatory approval yet again. The deadline expires at the end of next month but the Seoul government has made clear it has no plan to give a green light any time soon. HSBC, which had already extended the deadline by three months from April, has said it can’t wait for regulatory approval for ever and hinted at walking away from the protracted deal.

Lone Star and HSBC had hoped the government would make a decision once the Seoul High Court ruled on legal disputes over the U.S. private equity house’s 2003 acquisition of KEB. The court on June 24 cleared Lone Star executives of manipulating share prices of a KEB unit to buy it cheaply, overturning a February conviction by a lower court. Yet state prosecutors plan to appeal the case to the Supreme Court, and Korea’s Financial Services Commission says it will withhold a decision on the sale until legal uncertainties are cleared. Prosecutors also allege that Lone Star executives colluded with Korean government officials to buy KEB at an artificially low price.

The legal disputes thwarted Lone Star’s earlier attempt in 2006 to sell its stake in Korea Exchange Bank to Korea’s largest lender, Kookmin Bank. Another factor making it difficult for President Lee Myung Bak’s government to approve the deal is prevalent public sentiment against foreign investors making windfall profits. Lee’s approval rating has been more than halved to around 20% since the government decided to lift restrictions on U.S. beef imports in April.

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