Seeking to Boost Takeover

More likely is the possibility that there will be no bidders for Woori Finance other than KDB Financial Group even though currently there are some hurdles for the KDB to be a successful buyer. In fact, as KDB Financial is a state-owned banking group, people have been raising the problem that a merger between it and Woori Finance, 57 percent owned by the state-run Korea Deposit Insurance Corporation, would make privatization of the combined entity difficult to achieve.

Under the country’s current financial regulations, financial institutions and local private equity funds are the only ones permitted to acquire a controlling stake in a financial holding company, while nonfinancial entities such as large conglomerates and foreign private equity funds are allowed to take no more than 10 percent. But a financial holding company is required to take a 95 percent stake of the bank it’s buying.

To attract more potential buyers, the Financial Services Commission(FSC) will review and revise the regulations on financial holding companies, allowing financial holding firms to control another financial firm with just a 50 percent stake.

“If we revise the regulation, it will be in accordance with three principals for the sales of Woori Finance, including maximization of public funds, rapid privatization and development of the domestic financial industry,” said Shin Je-yoon, vice chairman of FSC. The FSC said it will push to ease rules on bank ownership to allow the country’s financial holding companies to bid for Woori Finance Holdings, the nation’s largest banking group by assets.

Analysts said the rule change would help the takeover of Woori by KDB Financial, which has declared its interest in the deal. “Currently, Woori Finance can be either merged or bought,” said an official at the Public Fund Oversight Committee, which is supervising the Woori sale.

The FSC said it is willing to allow a financial holding company to take a 50 percent in a state-owned financial institution instead of a 95 percent stake as required under current law. The rule change would be limited to a five-year period as the government seeks to reduce its ownership of several banking groups.

Some analysts have said that previous attempts to sell Woori have fallen victim to concerns that it was too expensive for another banking group to absorb since it had an estimated market value of more than 11 trillion won (US$10 billion).

But other analysts disagreed with that assessment, explaining that possible buyers such as KB Financial Group and Hana Financial Group were not interested because of “their internal conditions.” They believed the rule change will not attract any more bidders besides KDB Financial. Government officials have expressed frustration that KDB Financial might be the only bidder for Woori, which could reduce its sale price.

Analysts said that Hana Financial might still be interested in acquiring if its proposed takeover of Korea Exchange Bank collapses. On the other hand, KB Financial Group Chairman Euh Yoon-dae seemed to waver in his previous stance that he had no intention of bidding for Woori Finance. Asked about the issue again, Euh wasn’t categorical, and kept repeating, “I don’t know.”

Since letters of intent for the bid are not due until June 29, market analysts said unexpected buyers could surface.

But if competitive bidding for Woori does not occur, then the government is expected to accept a merger between KDB Financial and Woori Finance.

“Can you change regulations when you are in the middle of a sports game? There could be public misunderstanding by reducing the required share to be purchased from 95 percent to 50 percent. It appears that the government is changing the rules to give a special favor to a certain bank,” said Cho Young-teck, an opposition Democratic Party lawmaker, during questioning of the FSC on May 27.

Kim Seok-dong, FSC chairman, denied this was the case, saying that KDB Financial is only one of the possible bidders.

The FSC plans to submit the revision at its regular decision-making meeting in June with the aim of introducing the rule change in July or August. The Korea Deposit Insurance Corp., the deposit insurance agency that holds a 57 percent stake in Woori, will accept letters of intent to buy its holding by June 29 and plans to select the preferred bidder by September, the Public Fund Oversight Committee explained. President Lee Myung-bak promised during his election campaign to privatize Woori and other companies that had been rescued by the government in the wake of the 1997 Asian financial crisis.

Meanwhile, KDB Financial is showing aggressive interest in Woori Finance. Kang Man-soo, chairman of KDB Financial, recently revealed a plan to go ahead with a “dual banking system” once he acquires Woori Finance. Under the system, KDB Financial will possess two banks under one financial holding company, rather than merging KDB and Woori Bank.

Financial experts have been quick to raise red flags. “When the two merge, it would delay the privatization schedule for both banks, which would be a big problem,” said Hahm Joon-ho, professor of international economics and finance at Yonsei University. “For now, it is more important to privatize the banks than raise corporate values,” he added.

Lee Byung-yoon, a researcher at the Korea Institute of Finance, said he is concerned about systemic risks stemming from a merger between Woori Finance and KDB. Lee said the creation of a mega-bank opens up monopolistic concerns. Lee joined a torrent of worry in the finance sector that a merger between two state-banking groups might delay privatization, which is one of the three principles set by the government for the sale of Woori Finance.

“After KDB Financial acquires Woori finance, it would take at least 20 years to fully privatize the bank,” said a financial industry official.

Another of the principles, a maximum return on investment for Korean taxpayers, could be difficult to achieve under a KDB Financial and Woori Finance merger, since they are both state-run banking groups that receive taxpayer money.

Despite calls from some quarters to establish a mega-bank in Korea, opponents within the government to a merger between Woori Finance and KDB Financial are lining up.

Kim Jin-pyo, floor leader of the main opposition Democratic Party, said KDB Financial purchasing Woori Finance would accomplish nothing. “The acquisition of Woori Finance by KDB Financial, which is fully owned by the government, is basically the same thing as taking something from your left-hand pocket and putting it in your right-hand pocket.”

“KDB Financial Group initially said it intended to become an investment bank, but now it is moving toward becoming a commercial bank. There is no reason for an investment bank to acquire Woori,” said Jun Sung-in, a professor of Hongik University, at a Korea Institute of Finance seminar.

However, FSC chairman Kim has been highlighting the need to nurture a global investment bank in Korea. “Since the function of investment banks are far behind in the local market, I hope financial institutions like domestic brokerages, will enter the IB market,” said Kim.

One possible scenario to create a global investment bank would be a merger between Woori Investment & Securities, a subsidiary of Woori Finance, and Daewoo Securities, a subsidiary of KDB Financial. If KDB Financial acquires Woori Finance, such a scenario is highly likely.