Hana Financial Pushes for Korea Exchange Takeover After Lone Star Ruling

Hana Financial Group Inc. (086790) will push to complete its purchase of Korea Exchange Bank from Lone Star Funds after a Seoul court ruled on a five-year legal dispute that stalled the U.S. buyout fund’s efforts to sell the lender.

“We will do our utmost to complete the Korea Exchange Bank takeover to best serve our shareholders,” Hana President Kim Jong Yeol said by telephone yesterday after the Seoul High Court found Lone Star guilty of stock-price manipulation. The company is now waiting for guidance from the financial regulator, which said it may order the Dallas-based fund to sell most of its 51 percent stake.

Wrangling with courts and regulators pushed back Hana’s plan to take over the bank by May and derailed two earlier attempts by Lone Star to sell its stake. A public backlash over the profits the fund has made on its eight-year investment may deter foreign takeovers in South Korea, impeding government plans to sell state assets such as Woori Finance Holdings Co.

“It has taken too long for the resolution of the KEB-Lone Star case,” Hank Morris, North Asia adviser at Triple A Partners Ltd., said by e-mail before the verdict. The delay “will have had a negative effect upon the plans of global investors in regard to direct investment into Korea.”

Hana Financial rose 2.5 percent to 36,400 won at the 3 p.m. close of Seoul trading and climbed as high as 38,400 won. Korea Exchange shares advanced 6.5 percent to 7,750 won after rising as much as 11 percent. The benchmark Kospi index advanced 2.9 percent.

Lone Star Fined

Paul Yoo, the former head of Lone Star’s South Korean unit, was sentenced yesterday to three years in prison by Judge Cho Kyung Ran. Lone Star was fined 25 billion won ($21 million) by the court. Korea Exchange Bank (004940) was found not guilty, Cho said after presiding over a retrial ordered by the Supreme Court this year following their acquittal in June 2008.

Judge Cho said Yoo spread false rumors of a possible capital reduction at Korea Exchange Bank’s credit card unit in 2003, with the intention of driving down its value before the lender merged it. The case brought into question whether Lone Star is a legitimate shareholder of Korea Exchange Bank and regulators have waited on its outcome before approving a change in ownership.

‘It Doesn’t Matter’

“It doesn’t matter whether Lone Star voluntarily sells the stake or is forced to do so,” Kim Sung Yong, a law professor at Sungkyunkwan University in Seoul, said before the judgment. “The result is the same: exit from its investment as it has wished.”

Korea Exchange Bank spokesman Lee Sun Hwan said the company respects the court’s decision on the lender. He declined to comment on the Financial Services Commission’s remark that it may order Lone Star to sell a 41 percent stake.

Jed Repko, a spokesman for Lone Star in New York, declined to comment on the court’s decision and on whether the fund will appeal to the highest court again. He also declined to comment on the regulator’s remarks that the commission may order Lone Star to sell 41 percent stake in Korea Exchange.

Hana has lost 18 percent since May 12, when the Financial Services Commission said it wouldn’t approve Hana’s proposed acquisition of Korea Exchange until Lone Star’s legal dispute is resolved. The FSC has left the deal in limbo for almost a year because of the litigation, prompting Hana and Lone Star to extend a deadline for the transaction to Nov. 30 from May and trim the purchase price by 6 percent to 4.4 trillion won.

Hard Sell

Lone Star shouldn’t be allowed to get so high price from the Korea Exchange Bank stake following the conviction, Yu Won Il, an opposite Creative Korea Party lawmaker, said at a parliamentary audit today.

“Public will never understand if after being convicted of criminal stock manipulation, Lone Star takes a huge premium from this stake sale,” Yu told Financial Services Commission Chairman Kim Seok Dong today.

Lone Star, which bought Korea Exchange Bank in 2003, first tried to sell the lender to Kookmin Bank in 2006, and the deal was thwarted amid the same legal dispute. Then in 2008, HSBC Holdings Plc (HSBA) walked away from a $6 billion deal to buy Korea Exchange as regulators delayed approval, citing the case.

While the court proceedings have postponed Lone Star’s exit, it has profited from the investment. The U.S. fund has recovered 2.5 trillion won after tax through block share sales and dividends out of a 2.15 trillion won investment in Korea Exchange, according to the bank’s data.

Hostile Sentiment

South Korean civic groups such as Seoul-based SpecWatch Korea have criticized foreign investors including Lone Star for pursuing an “eat-and-flee” strategy of buying companies and selling them quickly, pocketing big profits. Public discord and the U.S. buyout firm’s legal woes have dissuaded foreign investors from acquiring Korean companies, said Henry Seggerman, president of New York-based International Investment Advisers.

“The case is extremely negative for any prospective strategic investors,” Seggerman, whose firm manages the $25 million Korea International Investment Fund, said by e-mail before the decision. “Public sentiment is hostile toward profitable overseas investment, not supportive overseas investment.”

Overseas takeovers of Korean companies fell to $3.6 billion last year from a record $8.1 billion in 2005, according to data compiled by Bloomberg.

Lone Star was one of the first overseas firms to invest in South Korea following the 1997-98 Asian financial crisis that led the country to accept a $57 billion bailout from the International Monetary Fund.

To contact the reporter on this story: Seonjin Cha in Seoul at scha2@bloomberg.net

To contact the editor responsible for this story: Brett Miller at bmiller30@bloomberg.net

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Hana Pushes for Korea Exchange Takeover

SeongJoon Cho/Bloomberg

The headquarters of Korea Exchange Bank (KEB) in Seoul.

The headquarters of Korea Exchange Bank (KEB) in Seoul. Photographer: SeongJoon Cho/Bloomberg