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S.Korea Pension Fund Eyes Lone Star KEB Bid

South Korea's National Pension Service is interested in buying a majority stake in Korea Exchange Bank (KEB) from Lone Star, but has had no formal talks with the U.S. investment firm, a senior fund executive said.

Lone Star has said it is looking to sell its remaining 51% in KEB -- which UBS analysts say could be worth up to $6 billion -- to a strategic investor after unloading a 13.6% stake in South Korea's fifth-largest lender for $1.28 billion in a block trade on Friday.

"Now we have been accumulating money, we do not have many places to invest in," the pension fund's chief investment officer S.K. Oh said in a telephone interview.

"It is one of the good investment targets. We have several methods to buy it, including the formation of a consortium."

Lone Star Chairman John Grayken welcomed the pension fund's interest.

"The Korea Pension Fund certainly would be considered a strategic, long-term investor," he said in an e-mailed statement. "But there have not been any in-depth, substantive discussions."

One of the pension fund's outside asset managers appeared to have contacted KEB union leaders last week to hear their views on the pension fund's possible acquisition of the bank, Oh said.

Lone Star cancelled a $7.3 billion deal last year to sell KEB to Kookmin Bank, South Korea's top lender, because of a legal dispute.

Prosecutors say a former Finance Ministry official colluded with a lawyer hired by Lone Star and KEB's chief executive to inflate KEB's losses, allowing Lone Star to buy it in 2003 for around $900 million less than it was worth.

"I think Lone Star will be able to sell KEB before a court ruling," Oh said, adding Lone Star was not directly linked to the investigation on the legality of the 2003 sale.

Oh said he was confident the National Pension Service would receive regulatory approval if it went ahead with an acquisition.

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The pension fund has also been tipped as a potential buyer of a government stake in Woori Financial Group, the country's No.3 financial services firm, which has attracted few suitable buyers.

Buying the KEB stake could earn the fund dividend income and potential capital gains from a later sale to another investor.

For Lone Star, selling KEB to the pension fund could help mollify any public backlash against big capital gains that foreign investors have reaped from South Korean assets.

A sale is unlikely to happen this year, however, as Dallas-based Lone Star told investors it would hold its remaining stake for at least six months when it offered part of its KEB shares last week, a source said.

UBS said the KEB stake could be worth 16,000-17,000 won per share, or 5.3-5.6 trillion won ($5.72-$6.05 billion) in total, adding it expected the court case to take one or two years. At current market prices, the stake is worth more than $4.8 billion.

"A more competitive auction for (the) stake is likely once legal issues are resolved or regulators allow Lone Star to sell its 51 percent," UBS said in a Monday note to clients.

Kwon Hyouk-se, a director general at the regulatory Financial Supervisory Commission, said on Tuesday the KEB sale would take "quite some time."

"If a sale takes place, Lone Star will undergo a thorough review of its shareholder status," he told reporters.

Earlier this month, the U.S. fund ended talks about a possible sale of KEB to Singapore's DBS Holdings.

Grayken had told a local newspaper on Monday the fund was in talks with several strategic investors to sell KEB, but did not identify them.

KEB shares closed 1.9% lower at 13,300 won, against a 0.5% drop in the benchmark KOSPI.

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