Hana in talks to buy KEB for $4.1 billion

By Lee Chang-Ho and Denny Thomas

SEOUL/HONG KONG (BestGrowthStock) – Hana Financial Group (086790.KS: ) is in talks with private equity firm Lone Star to buy a $4.1 billion stake in Korea Exchange Bank (004940.KS: ), elbowing aside rival suitor Australia and New Zealand Banking Group (ANZ.AX: ).

Hana, South Korea’s fourth-largest financial services group by assets, confirmed it is in talks with U.S-based Lone Star (LS.UL: ) and said a decision will be made by next week on whether to buy the country’s No.5 bank or merge with bigger rival Woori Finance Holdings (053000.KS: ).

The sale of Lone Star’s KEB stake has been a long and eventful process — an auction that began in 2005 and saw failed bidders, office raids, and dumped investment banks.

A deal with Hana would scupper efforts by ANZ, Australia’s fourth largest bank, which had just taken its next step by starting price talks with Lone Star, sources said last week.

But a combination was seen as positive for Hana, with its shares rising as much as 5.5 percent.

“Hana is the smallest of top banking groups with probably the weakest client base. If Hana takes KEB, that is a good news in that it will be able to expand market share in this fiercely competitive industry,” said Daewoo Securities analyst Ku Yong-uk.

“Whether Hana has financial prowess to close the deal is another question. Pricing is the key.”

KEB VS WOORI

A senior Hana executive said a decision on a partner will be made by next week.

“We’ve decided to look into KEB this weekend for a possible takeover target and will decide by next week whether we’ll bid for KEB or Woori,” said the executive, who declined to be named as the talks are held privately.

“Hana has come and signed an exclusivity agreement and till such time, ANZ is out of the process,” a source familiar with the process said. The source declined to be named as the talks are confidential.

“This process has not been secret and Hana like others saw an opportunity and moved in quick,” the source said, adding Hana has indicated it will pay about 10 percent premium to KEB’s current market value of about $3.8 billion.

Hana has been considering merging with Woori as the South Korean government tries to sell its 57 percent stake for at least $6 billion.

South Korea wants letters of intent from potential investors of Woori by November 26 and is requiring bidders to buy at least 4 percent of the lender.

KEB’s strengths in some segments was seen helping boost the combined entity’s margins.

“Hana will continue to be No.4 in terms of size,” said Bryan Song, an analyst at BofA Merrill Lynch. “However, the merged entity will have diversified earnings sources and higher margins relative to a standalone Hana… (as) KEB has strength in FX-related fee business, trade finance and credit cards.”

KEB shares fell 3.5 percent on concerns it would not get hefty premium, while Woori dropped 4.3 percent, hit by concerns it may lose Hana as a potential investor. ANZ shares were little changed.

ANZ, which has its sights on becoming a regional Asian lender, has been inspecting KEB’s books since mid-August and its chief executive Michael Smith said last week it will make a decision on KEB in coming weeks.

‘PRICE TENSION’

Sources have said ANZ was considering paying a maximum of $4.5 billion for 57 percent stake held by Lone Star and Korean bank KEXIM, close to both book and market value.

“Mike Smith (ANZ CEO) is showing his discipline in acquisitions by not overpaying,” Mark Daniels, Head of Equities at Aberdeen Asset Management said.

“KEB would have easily taken ANZ to the 20 percent of profit from Asia by 2012. It just means they will need to search harder. There is still time,” Daniels added.

ANZ has been aggressively pursuing an Asian expansion strategy to diversify its earnings outside its mature home market where growth is becoming increasingly difficult, interest margins are tightening and regulatory pressures are building.

Another source said ANZ would wait and see how serious Hana is but it will not get into a long drawn bidding war, referring to the late stage emergence of Hana as a move by Lone Star to trigger a “price tension,” after at least four years of failed attempts to sell KEB.

Lone Star and ANZ both declined to comment on reports of the agreement, but ANZ said it was continuing with due diligence on KEB.

Lone Star bought KEB for $1.2 billion and sold down part of its stake in 2007. It had previously attempted to sell KEB to Kookmin Bank (105560.KS: ) for $7.3 billion in 2006 and HSBC (HSBA.L: ) for $6.3 billion in 2008.

(Additional reporting by Narayanan Somasundaram in SYDNEY, Ju-Min Park and Jungyoun Park in SEOUL, Writing by Miyoung Kim; Editing by Lincoln Feast and Muralikumar Anantharaman)

Hana in talks to buy KEB for $4.1 billion