Losing its largest shareholder status for the first time in eight years, Lone Star is about to dispose of its KEB (Korea Exchange Bank) shares. The way it sells its stake is expected to hinge on the final decision of the Financial Services Commission.
On October 31, the FSC gave Lone Star prior notice of its disposal order, with the hedge fund failing to meet requirements for the status. However, the execution order has still yet to be delivered. “We are currently going through legal matters, and when the process is over, we will have a meeting to wrap the case up,” said the commission. In fact, the regulator had been intending to open a special meeting on November 8 to order Lone Star to sell its KEB stocks exceeding the holding limit. Hearing the news, Lone Star made a request for the maximum period possible for its fulfillment of the order.
Lone Star, Industrial Capital or Financial Capital?
In possession of 51.02% of total KEB stocks, Lone Star signed a SPA (Stock Surchase Agreement) with Hana Finan-cial Group in November 2010. The hottest button surrounding Lone Star as of now is clarification of capital identity, i.e., whether it is an industrial capital or a financial capital, because this will yield starkly different outcomes down the road. The commission’s forced disposal order will cover 10 percentage points of the stocks in question if Lone Star is assumed as a financial capital and four percentage points if it is seen as an industrial. As such, interested parties are paying particular attention to the FSC’s final decision.
Under such circumstances, the labor union of KEB is claiming that capital adequacy should be analyzed first. “There are clues that Lone Star is an industrial capital, and if this is true, its contract with Hana will have no effect whatsoever and an open bidding has to be made from scratch,” it said. The union is continuing its demonstration under the slogan “Punitive Compulsory Disposal on Lone Star.”
The union held a news conference to that end on November 7 at the Press Center building in Seoul, in tandem with five opposition parties, civic groups, labor organizations, etc. Numerous college professors and academic association members chimed in, too. The union warned that it would hold the commission liable in the event of Lone Star finding its way out of Korea by taking advantage of the negligence of the FSC. If no punitive measure is taken, the FSC is most likely to face stiff resistance from these groups.
As the union said, Lone Star’s SPA with Hana will become null and void once it is identified as an industrial capital, since the limitation of voting rights imposed on it is valid not from the time of the authorities’ order but from the moment of the identification.
What Will Be Trump Card of FSC in Catch 22?
With the situation as it is, financial authorities are concerned about the possibility of repeating their eight-year failure yet again. The FSC, for now, is simply re-confirming its general stance, saying, “We will have in-depth discussions, and not rule out any possibility regarding this very critical issue.”
However, it is not that the regulator is keeping perfectly quiet about the classification, either. Back in March, it anno-unced that Lone Star could not be considered an industrial capital. This was the conclusion of the first eligibility test ever since March 2007, when doubts as to the funds’ identity had begun to arise for the first time. It added, “The majority of foreign stakeholders are located overseas, where Korean laws and regulations are ineffective, and thus there are some limitations for us to draw the line.”
Meanwhile, KEB’s employees and minority shareholders have filed for an injunction with the Constitutional Court, resulting in the order being withdrawn. Citing the Banking Act, which stipulates the commission make a judgment every six months on whether Lone Star is an industrial capital or not, they are arguing the commission’s recent announcement is groundless because it failed to observe the act. If the Constitutional Court accepts the petition, the FSC cannot issue its final order without another review of identification.
It appears the FSC will take either one of two options, that is, an ordinary order of disposal or industrial capital evaluation. At present, the former is somewhat more likely. In the case of the former, Lone Star has to sell the 10% percentage points to Hana Financial Group and then leave Korea. This way, the country can keep its international credit standing intact while being able to raise its financial sector’s competitiveness by enlarging the size of the industry. There is a stumbling block though. The order given without classification constitutes a dereliction of duty under the current penal code.
There is a way of “capital screening”as an alternative. This method is not only free from the criticism of “dereliction of duty” but also ensuring that the stock disposal goes on as scheduled. However, it is unlikely that the FSC will lean toward this as Lone Star, in that case, may file a lawsuit against the Korean government. With global economic uncertainties still lingering, there are no reasons to label itself a country with investment risks. “What we are talking about is Lone Star’s unit in Belgium and we are in an investment protection agreement with that nation,” warned economics professor Jeon Seong-in at Hongik University, continuing, “If Korea violates the provisions concerning the most favored nation treatment, remittance-related ones and the like, it may have to face lawsuits against foreign investors or end up at the ICSID (Interna-tional Centre for Settlement of Investment Disputes).”
Will the Destination Be Hana Bank?
The present consensus is that the law in force is inadequate to determine the specific ways of disposal. Founded on this, the possibility of an unconditional sale to Hana is emerging.
Hana Financial Group and Lone Star are having a battle of wits regarding proceeding with the contract on the commission issuing its final order. The acquisition price was set at 13,390 won per share and stock price at 8,260 won as of November 7.
As of now, no additional price negotiations are likely to take place. Lone Star recently announced that it cannot but follow the terms until the end of November, when the contract expires. Similar is Hana’s official stance. “Not one of our major stakeholders is willing to allow a price cut, which means the current price itself is quite decent when the future value of the stocks are allowed for,” said the group.
However, irrespective of the expressions, many are guessing that the two are engaged in a tug of war behind the scenes. “Hana has made a proposal with the price adjusted to slightly over 10,000 won but Lone Star is in hesitation,” said an insider, adding, “At the end of the day, I think they will concur with each other at a level between 11,000 and 12,000 won.”
Then, why is Hana trying to take over KEB in spite of the high cost? Above anything else, the acquisition will boost its gross assets to 309 trillion won, meaning it can rank with other financial holding companies in the domestic banking sector -- the third-ranking Shinhan Financial Group’s assets currently total approximately 329 trillion won. Furthermore, the takeover can be an opportunity for Hana to shore up its overseas and corporate sales networks.
On November 8, Lone Star ann-ounced that it included in its written opinion a request for the maximum possible extension of the order execution period. That is because Hana Financial Group, once the order is issued, will probably demand a renegotiation on the equity sale price. However, Lone Star can stall for time renewing the contract and contacting other potential purchasers even if the SPA expires later this month.
Hana’s position is the other way around, of course. For it, a shorter execution period means it can put more pressure on its counterparty, while maintaining the contract and citing the forced disposal to cut the management premium and selling price alike. Watched with keen interest is the price battle between the two and the FSC’s final say.