DEALTALK-HSBC may have another go at S.Korea’s KEB

(For more Reuters DEALTALKs, click on [DEALTALK/]

* HSBC will think long and hard before turning down KEB

* KEB deal an opportunity to enter lucrative Korean market

* HSBC and KEB have seen failed M&A attempts

* Block sale might be ‘Plan B’ Lone Star is considering

By Kim Yeon-hee and Michael Flaherty

SEOUL/HONG KONG, March 17 (BestGrowthStock) – It’s early days, but
speculation is already building that HSBC (HSBA.L: )(0005.HK: ) may
participate in the auction for a $3.9 billion stake in Korea
Exchange Bank (004940.KS: ), South Korea’s sixth-largest lender.

Domestic lender Kookmin and fourth-ranked Hana Financial
Group (086790.KS: ) are widely expected to place bids for the 51
percent stake that U.S. private equity firm Lone Star
officially put back on the block last week. State-run Korea
Development Bank may also bid, according to investment bankers
and analysts.

What would make the auction interesting, however, is if a
foreign bank took part in the process, adding a cross-border
element and possibly bidding up the asking price along the way.

At the moment, the bank most likely to fill that role
appears to be HSBC, which announced a deal, that eventually
failed, to buy the Lone Star stake in Sept. 2007. Local media
reports have said HSBC was courting KEB even in 2005, when
Kookmin was working on a deal to buy KEB, which also failed.

HSBC is not commenting on the matter.

While HSBC, Europe’s biggest bank, may be tempted to fill a
gap in its Asian holdings by pursuing KEB once again, Basel III
capital reform and other regulatory changes could deter it from
big deals and instead force it keep its powder dry until the
landscape is clearer.

Still, HSBC’s head of South Korean operations, Matthew
Deakin, has previously hinted that he’s on the lookout. He told
reporters last October the bank was always open to interesting
offers, adding: “Right now, we have no interest. But the world
is changing.”

Investment bankers say it’s too early to identify any
affirmative bidder and any deal, if it succeeds, could slog
through the remainder of the year.

Confidence about any sale being completed is not exactly
high either, as two deals for KEB have failed before.

And while Lone Star’s [LS.UL] effort to exit KEB is one of
Asia’s most infamous M&A sagas, it still represents a huge
opportunity for a foreign bank hoping to expand into Asia’s
fourth-largest economy.

Acquiring a bank is the quickest way for an outsider to get
established in South Korea’s competitive but potentially
lucrative market for financial services, including retail
banking and asset management.

Citigroup (C.N: ) and Standard Chartered (STAN.L: ) became
major players by buying domestic rivals in South Korea.

KEB has over 5.4 million deposit customers with over 350
branches and a presence in 18 countries, making it Korea’s
leading international bank.

Macquarie estimates KEB’s value as an M&A target would
fetch a premium of 20-40 percent from the current market price,
or 17,000-20,000 won apiece. That compares with Kookmin Bank’s
offer of 15,400 won in 2006 and HSBC’s bid at 18,045 won in
2007.

But KEB is already one of the most expensive stocks among
Korean banks, trading at 1.3 times book value, versus the
sector average of 0.8 and 1.2 times for the country’s top
financial services firm Shinhan Finance (055550.KS: ), according
to Thomson Reuters data.

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For a graphic on KEB shares and results,

http://graphics.thomsonreuters.com/310/KR_KEB0310.gif

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GOOD FIT

KEB has particular strengths in trade finance and foreign
exchange, complementing HSBC’s global capabilities in these
areas, HSBC said in 2007.

HSBC has strengthened its Asia focus since the failed 2007
agreement with KEB, moving its CEO Michael Geoghegan to Hong
Kong this year. Unlike StanChart and Citi, HSBC has a
relatively small presence in South Korea.

HSBC first tried to buy a Korean bank during the Asian
financial crisis in the late 1990s. Its bid to buy nationalised
Seoulbank, which was later bought by Hana Bank, faltered in
1999 due to differences over how to value its loan book.

Since HSBC walked away from its $6.3 billion offer for the
majority of KEB in late 2008 amid a global credit crisis, it
had denied its interest in the Korean lender. HSBC may well
indeed not be interested. But then again, it does say it’s
looking for opportunities in Asia.

“This is the last time a foreign bank will have this kind
of opportunity in Korea… HSBC would think long and hard
before saying ‘no,'” said an investment banker in Hong Kong.

Analysts doubt if the stake sale can take place as early as
the first half of the year, as Lone Star expects, because it
coincides with an effort by the South Korean government to
offload a 7 percent stake in third-ranked Woori Finance
Holdings (005300.KS: )(WF.N: ). [ID:nSEL002971]

The preference is to space out the processes, sources say,
rather than bunch the deals together.

“If it is foreign capital (that buys KEB), the sale could
be done quickly,” said Joanne Lee, an analyst with Shinhan
Investment Corp.

“But if Lone Star wants to include KB, Hana and other local
bidders in an auction, it will be difficult to see the sale
done in the first half.”

KB Financial Group (105560.KS: ) (KB.N: ), the parent company
of top domestic bank Kookmin, is viewed as one of the strongest
candidates to buy KEB, as it has 6.5 trillion won ($5.7
billion) in excess capital, but a prolonged vacancy in top
management could mean slow execution in transforming M&A deals.
[ID:nTOE62909V]

Analysts say Lone Star would prefer to offer its majority
stake in KEB in an auction to fetch a 20 percent plus premium.

But sources say that because Lone Star has already recouped
the $1.2 billion it paid for the stake, a ‘Plan B’ would be to
gradually sell down its stake in the open market through block
sales. But sellers normally push for an acquisition premium.

“Given the fact that Korea will host the G20 (summit)
meeting this year, political influence on the KEB deal would
likely be minimised,” said Chan Hwang, head of research at
Macquarie in Seoul.

“Hence … we cannot rule out the possibility that foreign
banks could be a candidate for acquiring KEB.”

Stock Market Report

(Additional reporting by Steve Slater in LONDON, Editing by
Muralikumar Anantharaman)

DEALTALK-HSBC may have another go at S.Korea’s KEB