Lone Star scraps $7.4 bln deal to sell Korean bank over probe

U.S. private equity group Lone Star Funds said Thursday it had pulled out of a US$7.4 billion contract to sell a controlling stake in Korea Exchange Bank (KEB) to Kookmin Bank, citing an intensifying investigation into the fund's acquisition of KEB.

The termination is expected to deal a blow to Kookmin Bank, South Korea's top lender that wants to solidify its No. 1 status in the nation's competitive banking industry by acquiring the smaller rival, analysts say.

In addition, attention is focusing on how Lone Star will recoup its investment from the purchase of KEB as prosecutors are stepping up the probe against the Dallas-based equity fund, which has been accused of allegedly manipulating the share price of KEB's credit card unit to help it buy the Korean lender at a bargain price.

In late 2003, Lone Star bought a 50.5 percent stake in KEB for 1.4 trillion won ($1.5 billion). In May this year, Kookmin Bank agreed to buy a 71 percent stake in KEB, including Lone Star's total shareholding.

South Korean prosecutors launched the investigation into the allegation in March. So far, the prosecution is seeking the extradition of two Lone Star executives -- Vice Chairman Ellis Short and General Counsel Mike Thomson.

Also, KEB and LSF-KEB Holdings SCA, Lone Star's Belgium-based holding company that owns the 50.5 percent stake in the Korean lender, were indicted over the stock-price manipulation charge.

The U.S. fund has strongly denied any wrongdoing.

"We have concluded that we cannot move forward with the sale of KEB to Kookmin Bank due to the continuing investigations surrounding Lone Star's investment in KEB and KEB's subsequent rescue of its credit card subsidiary," Lone Star Chairman John Grayken said in a one-page statement.

Grayken said he will consider "strategic options, once the investigation is finally completed.

"Until then, we will continue to vigorously defend our company and our officers against the Prosecutors' groundless accusations," Grayken said.

Officials at Lone Star's Korean unit weren't immediately available for comment.

After the news was reported, Kookmin Bank's Chief Executive Kang Chung-won said the bank has "prepared for alternatives for growth while standing on its own feet," confirming the deal's termination.

However, Kang said there remains room for renegotiations with Lone Star.

"There is a possibility of renegotiations and no indemnity from the contract termination," Kang told reporters in a press conference.

Hanwha Securities' chief researcher Lee Jong-woo said, "Since it will be difficult for Lone Star to find a buyer of KEB anytime soon, the fund will likely delay the stake sale until the investigation is completed." Chae Dong-wook, a senior prosecutor who is in charge of the Lone Star probe, said the deal's termination won't affect the ongoing investigation.

"We will continue the investigation," Chae told reporters, saying he will announce the probe's results in mid-December.

Seoul, Nov. 23 (Yonhap News)