HSBC and Lone Star announced yesterday that they have agreed to extend by a further three months the deadline for completion of the UK bank's proposed purchase of 51.02% of Korea Exchange Bank (KEB), subject to approval from Korea's Financial Services Commission (FSC).
The deadline for closing the deal, which was announced on September 3 last year, had been fixed at April 30; it must now be closed by July 31, although it can be extended by a further two months after the date of FSC approval. Either party can terminate the acquisition agreement during a window of seven days at the beginning of July, but once the regulatory green light has be given, neither can pull out of the deal.
The terms of the transaction are unchanged. Adjusting for a dividend paid following KEB's 2007 results, HSBC Asia Pacific Holdings (UK), a subsidiary of HSBC group, will pay about W3.173 trillion ($6.02 billion) in cash. Under a shareholder's agreement with Lone Star, the Export-Import Bank of Korea (Kexim) can force HSBC Asia to buy all or part of its 6.25% stake in KEB at substantially the same terms. The UK bank doesn't plan to make a tender offer to KEB's remaining shareholders, and after the completion of the acquisition, KEB will stay listed on the Korea stock exchange.
If HSBC succeeds in buying a majority stake of KEB, Korea's sixth biggest bank, it would bring an end to the long, debilitating saga of the circumstances of its purchase by American private equity firm Lone Star in 2003. Controversy and prosecutions continue, centred on accusations of stock manipulation and tax evasion in a climate still resentful of foreign raiders picking up Korean assets at knock-down prices when the country was reeling from the financial crisis in the late 1990s. But there is finally hope that KEB's future can be resolved, despite the passing of the initial deadline for closing the deal.
KEB has a strong brand, with 350 local branches, offering personal finance and high-net-worth-individual services and has trade and foreign exchange operations. It has strength in depth. Its purchase would give HSBC, which has just 11 Korean branches, a critical mass. KEB is also the only Korean bank with a meaningful international presence, with operations in North America and throughout Asia as it follows its domestic customers overseas.
And the benefits could work both ways—which is always a key consideration when selling the proposal to a sensitive Korean public. If it could have access to HSBC's 10,000 offices worldwide, KEB could effectively become Korea's first global bank. So the two banks could form a joint venture for long-term partnership and success—HSBC could even be perceived as a "Korea-friendly" investor. Now, that would be a novelty and might even encourage foreign companies to look again at opportunities in corporate Korea.
However, HSBC's bid comes at a time when banks prepare for the implementation of Fiscma (the Financial Investment Services and Capital Market Act) at the beginning of next year; and when there is growing controversy about bank ownership.
Foreign share ownership of Korea's major commercial lenders ranges from 60% to 80%, and there has been some concern in the local press about the amount of dividends paid out to those foreign shareholders. Kookmin, for instance will pay W824 billion out of the W2.7 trillion of net profits last year, and 81% of that dividend will go to foreign investors.
Perhaps more worrying, the new Lee administration might relax the restrictions on chaebol shareholdings in banks, which were introduced after the financial crisis to prevent chaebol treating tame lenders as private piggy banks. Currently, an industrial group cannot own more than 4% of a national bank—although special permission can be obtained to hold 10%.