HSBC Holdings said on Monday it was in talks to buy a majority stake in Korea Exchange Bank, valued at $4.5 billion and held by Lone Star, sending shares of Korea's fifth-largest lender higher.
The sale process has dragged on amid a protracted legal dispute between Dallas-based private equity fund Lone Star, which holds 51% of KEB, and South Korean authorities.
The legal disputes forced Lone Star to cancel a $7.3 billion deal last year to sell KEB to Kookmin Bank, South Korea's top lender.
Singapore's DBS had held talks with Lone Star for a possible purchase but ended negotiations, hinting at legal issues. KEB and Lone Star declined to comment.
Foreign banks keen to enter the Korea may find that acquisitions might be the only option left to them, given the South Korean government's reluctance to allow new entrants into the crowded banking sector.
Citigroup and Standard Chartered became major players through acquisitions of domestic rivals, which HSBC had also attempted to buy.
"HSBC does need a bigger network for its South Korean business," said Han Jeong-tae, an analyst at Hana Daetoo Securities.
Another analyst said the reported deal was highly likely to happen because the London-based bank would be regarded as a preferred buyer by the South Korean government after previous KEB suitor DBS broke off talks in June.
"HSBC already has been doing banking business domestically, and seems to have a high possibility to win government approval," Goodmorning Shinhan Securities' banking analyst Hong Jin-pyo said in a note sent to clients on Monday.
Lengthy Process Ahead
South Korean prosecutors say a former government 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 for around $900 million less than it was worth.
"Presumably what HSBC are offering is a clean, non-contingent cash-based exit which they certainly have the financial capacity to do, and on the other hand they'd probably want some give-up there in terms of price," said Bill Stacey, banking analyst at Credit Suisse in Hong Kong.
KEB trades on a multiple of around 8.5 times earnings, according to Reuters' data. Korea's top bank, Kookmin and the No. 2 bank Shinhan Financial Group trade on roughly the same multiple.
But Hana Daetoo's Han said South Korean authorities may prefer local bidders over HSBC.
"If KEB is sold to HSBC, it will mark a third major Korean bank bought by foreign players. The regulator won't like it very much."
An official of the regulatory Financial Supervisory Commission told Reuters it would wait for a final court ruling before giving the nod to any possible KEB sale.