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Korea Exchange Bank CEO Richard F. Wacker walks through Incheon International Airport on 22 November after a visit to the U.S.
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U.S.-based fund, facing continued investigation, may pull out of deal
The U.S.-based Lone Star Funds, which is in the process of selling its controlling stake in Korea Exchange Bank (KEB), is staging a two-pronged battle amid widening investigation into its alleged involvement in financial irregularities. On one hand, the fund is demanding dividend payments from KEB, but on the other hand it is threatening to terminate the transaction altogether. Some experts say the chances are slim that Lone Star will withdraw from the ongoing negotiations, calling the recent gambit just a part of its "brinkmanship" strategies. On Nov. 22, John Grayken, chairman of Lone Star, told the Financial Times that the company is reviewing the possibility of terminating its negotiations to sell KEB. Grayken said the company was making an internal decision about what to do regarding the sale. Earlier, Grayken told the Reuters that talks with Kookmin Bank, the slated buyer of KEB, are on hold. In an interview with Bloomberg, Grayken also said that Lone Star is seeking dividends from KEB, adding that it is meaningless to go ahead with talks on the sale of its 64.62 percent stake in the South Korean lender. The remarks are interpreted as a move to seek compensation for interest costs stemming from the investigation's delay of the deal to sell its stake in KEB to Kookmin Bank. According to financial sources, these lost interest costs are estimated at around 230 billion won (US$245 million) based on the figure of 6.9 trillion won it agreed upon with Kookmin for the sale. Lone Star will be able to reap huge profits through dividend payments even if the the sale process collapses.KEB, South Korea's fifth-largest lender, reported 958.2 billion won in last year's retained earnings carried forward to this year. Its accumulated net profit of this year is projected at around 1.2 trillion won. Including earnings carried over from last year, the South Korean lender reportedly holds around 2 trillion won that can be paid out as dividends. Lone Star could reap some 1.3 trillion won through dividend payments alone, sources said. So far, Kookmin Bank has not issued its official stance on the issue. A Kookmin official, declining to be named, said that it is still reviewing what Lone Star wants in the deal. He added, however, that internally Kookmin is not excluding the possibility of the deal's collapse. In August, Kim Ki-hong, the bank's chief executive vice president, said that the deal might be scrapped by Kookmin. Prosecutors remain unfazed with the ongoing media blitz, saying its probe into Lone Star will continue. "Investigation will proceed as originally planned," Chae Dong-wook, senior prosecutor at the Supreme Prosecutors' Office, told reporters. Since March, the U.S. company has been under investigation over allegations that the financial strength of KEB was deliberately undervalued in order to help the fund purchase a majority stake in the troubled bank at a below-market price. A financial source noted that Lone Star might consider finding an alternative candidate to acquire KEB, believing that it could reap profits from dividend payments should the current Kookmin deal collapse. However, Cho Byeong-mun, a researcher at Hannuri Investment & Securities Co., said Lone Star's recent pursuit of dividend payments could be interpreted as its frustration with the delayed contract amist the prosecution's investigation. Cho said he thinks Lone Star would not have an easy time finding a buyer willing to pay what Kookmin has offered, which is close to 7 trillion won. "Therefore, the chances that the deal will collapse are slim," he said. Please direct questions or comments to [englishhani@hani.co.kr]
