The Disposal to be Continued

Three major private equity funds (PEFs) in Korea - Vogo Fund, MBK Partners and TStone Partners - have entered a bidding battle for Woori Finance Holdings after forming consortiums with strategic investors. Meanwhile, local financial holding companies such as KB, Shinhan and Hana Financial Group have withdrawn altogether, along with overseas PEFs.

The Korea Deposit Insurance Corpora-tion (KDIC), the largest shareholder of Woori Finance, closed the LOI application at 5:00pm, June 29. The three consortiums submitted letters of intention, while financial holding companies backed out after revision to the enforcement ordinance of the Financial Holding Companies Act, which was to lower one holding company's ownership of another from 95% to 50%, fell through.

“The disposal of Woori Finance Holdings will continue as scheduled,” said Kim Seok-dong, chairman of the Financial Services Commission (FSC), on June 30. The Public Fund Oversight Committee (PFOC) under the commission echoed the sentiment at a meeting the same day, stating, “The procedure is in progress without any problems and we will try to keep it fair.”

Despite the government looking forward to the participation of financial holding companies, the financial authorities’ judgment is that the conditions for effective competition have been met by PEFs turning in their LOIs. All of those involved are major funds with decent track records in Korea. The PFOC is scheduled to hold a general meeting next month in order to finalize relevant schedules in detail.

With the disposal process on track, competition among prospective buyers is heating up. Min Euoo-sung, who was former chairman of Korea Development Bank (KDB) Financial Group and now is leading TStone Corp, met with some reporters along with CEO Won Joon-hee immediately after the announcement. There, he remarked that he will nurture Woori into a leading Asian bank together with local long-term investors and overseas financiers.

“We are determined to acquire Woori Finance Holdings and we are able to secure the four to five trillion won needed to buy the 30% of shares, which is the minimum requirement to stay in the bidding,” adding, “Two-thirds of the money will come from local long-term investors, with the rest coming from foreign investors.”

Min went to stress that he is not joining the bid with some short-sighted future profit in mind. “Our plan has been received positively by investors, though we cannot reveal specific details.” Those in the financial world are interpreting the comments as a forestalling response to MBK announcement that it engaged the Korea Federation of Community Credit Cooperatives (KFCC) as its strategic investor.

TStone Partners is the relatively less known PEF among the three. CEO Won Joon-hee has built his career at foreign investment banks like Lehman Brothers Holdings and CSFB. He met chairman Min Euoo-sung when he was at Salomon Smith Barney. The chairman, on his part, built personal rapport with large banks in Japan and Kohlberg Kravis Roberts (KKR) while at the helm of KDB. As such, it is expected that chairman Min will raise money at home and abroad by making use of his international financial career. “We will acquire at least 30% of the shares,” he said, adding, “Our investors are favorable to our roadmap and it seems that the funding process will go along without a hitch.”

In the meantime, MBK Partners is asserting that it should be the one to take over Woori after getting the KFCC on its side as a strategic investor. “If Woori ends up in our hands, the KFCC will take charge of the management while MBK, well-versed and seasoned in financial investment, will enhance corporate value and pay dividends to the entire sector.” Concerning the funding plan, it remarked, “It is no tall order to prepare five trillion won or so with the KFCC’s assets under management reaching 20 trillion, and we have already secured approximately 3.5 trillion to boot.”

MBK’s strategy is to give the management rights to the KFCC, and get involved only in part as a financial investor before quitting after a few years with some profit. “The KFCC has gross capital worth 100 trillion won and it is running no less than 3,200 branches nationwide” it said, adding, “That is why we think our consortium is highly complementary and why we believe we should be the one.”

MBK Partners is Korea’s largest PEF. It was established in 2005 when chairman Kim Byung-ju, the fourth son-in-law of honorary chairman of POSCO Park Tae-joon, gathered some of his colleagues and M&A specialists in the Carlyle Group. CEO Yoon Jong-ha is also from the group. Vice president Kim Kwang-il built his reputation at Kim & Chang, the largest law firm in Korea, as an M&A lawyer.

Chairman Kim, back in 2001 when he was at Carlyle, worked with the PEF of JP Morgan, acquired Hanmi Bank making profits of over 700 billion won by selling it to Citibank three years later. Furthermore, since founding MBK, he has reaped huge profits by handling HK Savings Bank and Hanmi Capital, etc. He negotiated with Lone Star Funds over the Korea Exchange Bank deal last year and has previously been involved in a tender for Woori.

The last of the three, Vogo Fund, is not showing its tactics yet. It has been aggressive in taking over financial institutions and come under the spotlight after acquiring shares of Tong Yang Life Insurance and BC Card. Representatives include: Byeon Yang-ho, former director of the Fiscal Policy Bureau of the Ministry of Strategy and Finance; Lee Jae-woo and Shin Jae-ha, two of the most prominent experts in the industry; lawyer and M&A specialist Park Byeong-moo, who led the disposal of Jeil Bank which is now SC Korea First Bank.

Local Securities Firms Rather Dubious

The financial sector, nonetheless, is still somewhat skeptical of the deal in that the government cannot but be conscious of the burden stemming from selling Woori Financial Holdings to a PEF. It was in this very vein that the chair of the FSC said, “We will watch how these PEFs organize consortiums and proceed with the bidding.” In other words, the government seems to be getting more and more doubtful about the capability of the PEFs to ink the deal.

Currently, the government is planning to dispose of 56.97% of the shares, with the minimum acquisition requirement set at 30%. It will take approximately four trillion won to do this, and the government is questioning whether these groups can do this.

Another reason for such skepticism is the innate character of a PEF, i.e., to chase after short-term profits and then wash its hands of it later. As Woori Financial Holdings is the largest of its kind in the country, its sale to a fund cannot be totally free from controversy.

“The concerns of the government and public are not groundless when we take the Lone Star case into account,” said an industrial insider, adding, “It seems that the former will halt the process if some dispute arises over the reputation and quality of the strategic investor and fund and if the acquisition is deemed to harm the development of the financial industry, which is one of the three principles for the privatization of the holding company.” Lee Go-eun, a principal researcher of Shinhan Investment Corp, added in, “The government has good reason to feel pressured handing over the super-size institution to a PEF since it does not match the development direction it wishes the industry to take.”

“The eat-and-run controversy could be fired up once again,” remarked Im Il-seong, who is leading Shinyoung Securities’ finance team. He continued, “Actually, no one is likely to make it, and the privatization will take more time until the government brings it up later.”

More direct was senior researcher Yoo Sang-ho of Korea Investment & Securities. “There will be no acquirer at this time and the government is not going to give Woori to any of these PEFs because the purpose of de-nationalization is not limited to the recovery of public funds,” he commented.