US-based Lone Star Funds has appointed Credit Suisse to manage the sale of its holding in Korea Stock Exchange-listed Korea Exchange Bank (KEB), the firm confirmed in a statement last night.
Lone Star’s 51 percent holding in Korea’s 6th largest lender is currently valued at $3.9 billion. The firm stated that it expected potential buyers to include “Korean, non-Korean, strategic and financial investors”, adding there could be “no assurance that this process will result in a sale of the shares”.
The appointment of Credit Suisse marks a return to the fray for Lone Star, whose $1.2 billion investment in KEB in 2003 has been dogged by controversy since day one.
Shortly after the acquisition, the firm was accused by the South Korean government of colluding with corrupt officials and KEB management to exaggerate the financial distress of the bank at the time of the sale, enabling Lone Star to purchase its stake at a significant discount to its true market value.
The firm was also accused of manipulating the share price of the bank’s credit card division, which it acquired after its purchase of the holding in the bank.
The ensuing court cases spanned five years and saw both Lone Star and KEB fined $26 million for misconduct, and Lone Star’s country head for Korea, Paul Yoo, sentenced to five years in prison.
The firm was finally cleared of all wrongdoing in November 2008, but not before the legal wrangling had put paid to two of Lone Star’s attempts to divest its stake in KEB.
In September 2008, HSBC Bank terminated its agreement to acquire Lone Star’s stake for $6.3 billion due to the ongoing court processes and other factors such as declining asset values in world financial markets and the two parties’ inability to agree on terms. The previous year had seen a $7.3 billion agreement to sell the stake to Korean bank Kookmin Bank fall through.
Though the most serious contenders, Kookmin and HSBC have not been the only suitors to eye KEB. As recently as last year, Oaktree Capital Management, TPG and the California Public Employees’ Retirement System were all named as prospective buyers for the bank holding, although nothing came to fruition.
While Lone Star may have cleared its name in the courts, the Korean government appears unwilling to make it easy for the firm to walk away with the more than 3x return it stands to make on its investment in KEB.
Sources at Korea’s Ministry of Finance and Strategy, which oversees the nation’s financial policies, confirmed in early February it had reinitiated discussions on imposing a capital gains tax on US private equity firms exiting deals in Korea, although they said no firm decision had yet been made.
It was reported widely that these talks, which first began two years ago, were being revived in anticipation of Lone Star’s sale of its KEB stake this year.