Price For Acquisition: Biggest Huddle To Jump Over

Shinhan Holding Company was finally determined as the privileged negotiation partner for sale of CH Bank.

The Public Fund Oversight Committee convened a full session yesterday, and announced that Shinhan would be given privileges as the most promising buyer of CH Bank. The committee explained that Shinhan offered most "favorable terms" regarding purchase money and future management plan.

Thus, the Korea Deposit Insurance Corporation will negotiate with Shinhan for detailed terms and conditions of the acquisition including the acquisition price.

Committee chairman Chun Chul-hwan said, "During the negotiation procedure, we will raise the price as much as possible. That way, people will not be able to talk about dumping later. To achieve that goal, we will commission to a third party the taks of evaluation of CH Bank and its assets, which in turn will serve as the basis for our final determination."

▽ Biggest huddle: price = The committee hinged its selection of Shinhan as the privileged partner on the condition that it should get as much proceeds as possible and improve the other terms favorable to it.

For the government, the higher the acquisition price, the better, considering the labor union of the bank and the public opinion. On the other hand, the lower the better for Shinhan, since its shareholders and prospective investors would like it to pay a large amount of money for the acquisition.

What poses the biggest problem is Shinhan`s proviso, which provides that Shinhan could cut down on the purchase price (6,150 won per share, or $5 per share) up to 10% if it transpires upon scrutiny that further potential risks are detected.

Shinhan estimated, upon its preliminary research, that CH`s debts would amount to 1.5 trillion won. It, however, expects more to be discovered due to CH`s uncollectible loans to Ssangyong Group and its insolvent credit card customers.

On the contrary, the government intends to eliminate this clause and set the bottom line at 6,150 won per share. Thus, a conflict of interests is to follow, which requires a compromise on both sides for the deal to be consummated.

Shinhan`s chairman Nah Eung-chan announced, "We will conduct a probe for 4 weeks, and then commence negotiations in earnest to sign up an agreement. Once we acquire CH Bank, we could remark our position as a leading bank in the East Asian region."

▽ Shinhan`s plan = Basically, Shinhan plans to acquire all CH shares now held by the government (80.04%). It, however, intends to pay cash for half of the shares, while swapping the rest of CH`s shares for Shinhan`s shares at the ratio of 0.3428 to 1.

Shinhan plans to issue redeemable preferred shares to raise fund for the money required for purchase of the shares in cash, or approximately 1.7 trillion won. For the issuance, JP Morgan will take the role of guarantor, and US investors are supposed to buy them.

With the issuance of new shares for purchasing share of the government, the existing shareholders have to watch their shares drop in terms of percentage points. To prevent it, one of the big shareholders of Shinhan, Banque Nationale de Paris & Paribas Group, will participate in the capital raising estimated at 80 to 100 billion won in order to secure its 4% lead. Then, Japanese Korean investors will retain its No. 1 position.

Shinhan reportedly considers running CH Bank as a separate entity for the next two years, while incorporating and operating the online networks of the two banks together. But, it will spin off CH`s credit card division, and merge it with Shinhan Card.

Kwang-Hyun Kim Do-Young Kim kkh@donga.com nirvana1@donga.com