Lone Star Innocent of Wrongdoing in its Acquisition of KEB in 2003

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Lone Star has finally been cleared of all the accusations related to its purchase of Korea Exchange Bank in 2003. Much has been written and speculated regarding the motivation behind these accusations and the delay in completely clearing Lone Star, actions that ended up preventing the bank's sale to HSBC. Korean media emphasised the profits that Lone Star would have realised from selling KEB, information that raised the ire of much of the population. Lone Star has been cleared of all charges and is now free to sell KEB.....at a time when the global banking industry is in dire straights.

Following is a report on the cour's decision as it appeared in the Korea Times:

A Seoul court ruled Monday that the sale of Korea Exchange Bank to Lone Star in 2003 was not illegal as it was unavoidable at that time to prevent the then troubled bank from going bankrupt and burdening the economy.

It also ruled that the sale of a controlling stake in the bank to the U.S. private equity fund involved no behind-the-scene deals aimed to help Lone Star obtain KEB at unfairly low prices, clearing a former high-ranking government official and former KEB executives of charges of understating the value of the bank to sell it for cheaper than market prices.

"Ahead of the takeover, KEB sought major investors at home and abroad for a large amount of capital injection. But no investors with sufficient funds emerged except for Lone Star," said presiding judge Lee Kyoo-jin of the Seoul Central District Court. "With only Lone Star pursuing the bank's management control, KEB had no other choice but to transfer the management control to Lone Star."

In 2003, Lone Star paid $1.5 billion to take over a 51 percent KEB stake, then the country's fifth-largest lender. At that time, KEB was saddled with huge amount of bad loans in the aftermath of the Asian financial crisis in 1997-98, with its capital adequacy ratio deteriorating.

In 2006, the prosecution indicted a former Finance Ministry director Byeon Yang-ho on charges of breach of trust. He was also accused of having conspired with then KEB chief Lee Kang-won and Ha Jong-sun, an in-house lawyer at Lone Star, to artificially lower the bank's price by as much as 825 billion won than the fair market price.

The court cleared Byeon of all charges, while it sentenced Lee and Ha to jail terms of 18 months and eight months suspended for two years, respectively, for bribery.

"We cannot judge that the capital ratio estimate for KEB had been manipulated to lower the acquisition price or make Lone Star eligible to buy the bank," the judge said.

The court also cleared Byeon of all the allegations that he took bribes before and after the KEB deal was closed.

Lone Star has been fishing a potential buyer both at home and abroad after its attempt to sell off KEB to HSBC ended in a failure in September following the global financial meltdown. The deal had been in limbo for about a year as Korea's financial watchdog withheld approval, with the legal dispute still underway.

KEB recently set up a task force to help find a new investor. Korea's top retail lender Kookmin Bank has expressed interest in buying KEB, in a second attempt after Lone Star scrapped a deal with it in late 2006.

The court ruling cleared Lone Star of all legal disputes that have stood in the way of selling off the nation's fifth largest lender. Earlier in June, the court also cleared Lone Star Korea Head Yoo Hoe-won of charges of manipulating the stock price of KEB Card.

However, the investment firm is unlikely to find a potential buyer anytime soon due to falling stock prices.

Battered by a deepening liquidity crisis, KEB's stock price has almost halved since the failure of its sale to HSBC ㅡ it closed at 5,500 won per share Monday, down from 11,350 won Sept. 19.

Market analysts say falling stock prices have emerged as the biggest obstacle to the sale of the bank.

"I think that Lone Star may push for the sale, believing that the value has not changed despite a plunge in stock prices," a local brokerage analyst said on condition of anonymity.

"Given that Lone Star rejected the call from HSBC to reduce the sale price to 12,000 won per share, the fund is unlikely to sell off the bank at below 10,000 won. But it won't be easy to find a potential buyer at that price at this moment," he added.

Worsening financial soundness at local banks is expected to make the sale more difficult. Kookmin and Hana, which once showed strong interest in a takeover, are now struggling to stay afloat due to their weakening capital base.

In addition, with the deepening global credit crunch, the merger and acquisitions (M&A) market has suddenly turned into a "buyer's market," as many ailing businesses are being put up for sale at low prices.

"Now that KEB's share price has fallen sharply and financial firms in advanced countries are being put up for sale, it won't be easy for Lone Star to find a potential buyer unless it lowers the sale price," another analyst said.

Lone Star has chosen Credit Suisse as the lead manager for the sale, and is looking for a new major shareholder. In October, KEB set up a shareholder transition task force to find a potential buyer.

Both Lone Star and KEB declined to comment on the court ruling.

Source: The Korea Times (November 24, 2008)

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