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HSBC, Europe's largest bank, announced on Friday that it has terminated a $6.3 billion deal to acquire a 51 percent stake in KEB from U.S. private equity fund Lone Star, citing falling asset values and turmoil in the global financial market.
In September last year, London-based HSBC agreed to purchase the stake to build a presence in Asia's fourth-largest economy, but the deal had remained in limbo with legal disputes over Lone Star's 2003 purchase of KEB at $1.2 billion.
"Taking into account all relevant factors including current asset values in world financial markets," HSBC said it has decided to "exercise its right to terminate the acquisition agreement with immediate effect."
"As a result, it will not acquire Lone Star's shareholding in KEB on the terms announced on Sept. 3, 2007," HSBC Asia CEO Sandy Flockhart said in a statement.
"In the light of developments around the world, not least changes in asset values in world markets, we do not believe it would be in the best interests of shareholders to continue to pursue this acquisition on the terms negotiated last year," the statement said.
South Korea's financial watchdog confirmed the aborted deal, expressing regret at HSBC's "unilateral breach of contract." "It is regrettable that HSBC scrapped the deal," the Financial Services Commission said in a statement.
The watchdog said "significant" differences over price had led to the rupture of negotiations. HSBC has called for a cut in price, citing the fall in KEB shares and the recent global banking crisis.
A year ago, HSBC agreed to buy KEB at 18,045 won (US$15.8) per share, but the price tumbled to 11,350 won on Friday. Market watchers say HSBC dropped the KEB deal to purchase depressed financial institutions on Wall Street.
Analysts also said the long-delayed regulatory approval of the deal has also contributed to HSBC's decision.
The financial watchdog has delayed approval of the HSBC-Lone Star deal, citing "legal uncertainties," which referred to the ongoing court disputes, in a bid to buy time until a court ruling comes.
The legal battle centers on whether a senior finance ministry official and former KEB chief colluded to undervalue the bank to push for the sale to Lone Star in 2003 and whether Lone Star is deemed unqualified to become a legitimate owner of the lender.
South Korea bans non-financial companies from owning more than 4 percent of domestic banks, a rule designed to prevent banks from being used as private coffers for the family-run conglomerates in Korea, called chaebol. If Lone Star is classified as a non-financial company, it would have to sell down its stake in KEB to less than 4 percent.
But the watchdog already approved Lone Star's purchase of the stake in KEB. It had also waived the law for foreign buyout funds, allowing the Carlyle Group and Newbridge Capital to buy a 36 percent stake in KorAm Bank in 2004 and a 49 percent stake in Korea First Bank in 2005, respectively, in order to sell off the debt-laden lenders in the wake of the 1997 financial meltdown. The influx of capital helped revitalize the country’s sagging economy.
Seoul's court is expected to make a ruling as early as October, which would be followed by the watchdog's final decision, testing the patience of HSBC.
With HSBC exiting, South Korea’s local banks are pushing for acquiring the KEB stake. Kookmin Bank, the country’s top lender, seems to be the first in line for KEB.
Kookmin originally agreed to acquire the KEB stake in 2006 for $7.3 billion, but the contract was canceled due to legal procedures over Lone Star's qualification as the largest shareholder.
Kookmin said on Friday that it is still interested in buying KEB. "We still maintain interest and are closely monitoring the situation," a bank spokesman said.
Kookmin hopes to become a global banking giant by taking over KEB, while cementing its status as South Korea’s top leader. If Kookmin buy KEB, its assets could expand to 402 trillion won (US$353 billion) from 299 trillion won as of the end of July.
Hana Financial Group, the country's No. 3 financial services company, has also sought to buy the KEB stake to keep up with its bigger rivals.
More acquisition and merger deals are expected as the government plans to privatize Korea Development Bank, Woori Finance Holdings and Industrial Bank of Korea. Any financial group that takes over the banks on the sale could replace Kookmin as the market leader.
