Will canceled appeal expedite sale of Korea Exchange Bank?

U.S. private equity fund Lone Star, the major shareholder of Korea Exchange Bank, reported to financial authorities on Thursday that it has given up its appeal of its stock fraud conviction.

A lower court found Lone Star guilty of stock price manipulation involving Korea Exchange Credit Card on Oct. 6.

The canceled appeal is a signal that the fund will sell its shares in the state-run bank in accordance with legal procedures and leave Korea.

The Financial Services Commission said, “Lone Star sent us a fax on its decision not to appeal to a higher court in the morning,” adding, “It said it will go through necessary procedures such as the fulfillment of eligibility as the major shareholder since it was found guilty.”

Lone Star’s decision will accelerate Hana Financial Group’s efforts to take over Korea Exchange Bank within this year.

○ Order to sell shares in Korea Exchange

Had Lone Star filed an appeal to the Supreme Court by Thursday, it could have delayed administrative procedures imposed by the financial watchdog, such as the order to sell its shares. Many expected the fund to try to stall for time through an appeal to a higher court to capture the advantage in share sale negotiations.

Lone Star, however, apparently judged that the swift sale of its Korea Exchange Bank shares after giving up its appeal was more beneficial than taking flack for its attempt to withdraw from the bank after raking in huge profits while paying no attention to the bank’s growth.

Experts even say the American fund has agreed with Hana through secret negotiations on conditions for the transfer of its shares in the state-run bank.

To immediately order Lone Star to recover its eligibility as the major shareholder and sell its shares, financial authorities are considering convening a meeting soon instead of waiting until Oct. 19, when a regular meeting is scheduled.

Financial Services Commission Chairman Kim Seok-dong told reporters in Seoul’s Gangnam district, “Since we have reviews laws, it won`t take long (to follow procedures required for a stock sale).”

The financial watchdog will order Lone Star to sell its shares in the bank without precondition within a month after an order to meet eligibility as the major shareholder, a mere formality, was issued.

Separately, financial regulators concluded after reviewing banking law that they cannot order the American fund to sell its shares in a specific way.

○ Hana to donate profits to social welfare

The remaining question is the acquisition price. Hana extended in July the acquisition contract with Lone Star under the condition to buy a share for 13,390 won (11.60 U.S. dollars). Due to the European fiscal crisis, however, the share price fell to 7,920 won (6.80 dollars) Thursday.

So Hana will soon contact Lone Star to renegotiate the acquisition price. A Hana executive said, “Considering the steep fall in the share price of Korea Exchange Bank, the acquisition price should be cut by hundreds of millions of dollars,” adding, “But considering public fears over the outflow of national wealth, we will donate the profit stemming from the acquisition price gap to social welfare. This is the opinion of (Hana) Chairman Kim Seung-yoo.”

“We`ve indirectly heard that Lone Star is unwilling to cut the acquisition price,” he said, adding, “The acquisition price was basically set based on the intrinsic value of Korea Exchange Bank, but renegotiation is inevitable given that the bank’s share price has been halved.”

Financial experts, however, said a large cut in the price is unlikely because the contract between Hana and Lone Star has no provision for renegotiation on the sale price.

A provision on material adverse change, or MAC, is included in the contract to prepare for unforeseen situations such as an outbreak of massive terrorism and natural disasters, but the provision is meant to cancel the contract, not to adjust the acquisition price, according to experts.

If Hana takes over Korea Exchange Bank, the former’s combined assets will increase to 262 trillion won (226 billion dollars). This will make Hana Bank the second-largest bank in Korea after Kookmin Bank in assets as well as in the number of branches (1,008) and employees (16,606).

If post-merger integration processes to remove overlapping businesses are completed, the figure will decline. Given the marketing environment of domestic banks that value contact points with customers, Hana Bank can rival Korea’s top three banks.

An executive of a commercial bank said, “Due to this synergetic effect, (Hana) Chairman Kim Seung-yoo wants to take over Korea Exchange Bank within this year, though the group is under strain to an extent.”

legman@donga.com higgledy@donga.com