U.S. News

Lone Star Sees Further Korea Buys Once KEB Is Sold


U.S. private equity fund Lone Star said on Friday it will start to look at fresh investments in South Korea, once it sells its 51% stake in Korea Exchange Bank (KEB) and pending legal proceedings are resolved.

The Dallas-based fund, the most active foreign investment fund in Asia's fourth-largest economy, sold a stake in KEB and two domestic firms for a total of $2.3 billion last week, as it began to exit from its key Korean asset.

Now it is looking for a strategic buyer for its 51% stake in the Korean lender, its main asset in the country, Lone Star Chairman John Grayken told Reuters in an email interview. 

"We intend to invest further in Korea as soon as we can resolve the pending investigations and re-focus our attention on our business," Grayken said. "We have been here a long time and see a long future. We'll start to look at this once our remaining share in KEB is sold."

Lone Star sold a 13.6% stake in South Korea's fifth-largest lender for $1.28 billion in a block trade last Friday, to pay down debt and return profits to its investors.

The fund's remaining KEB shares are worth 4.5 trillion won ($4.9 billion) at market prices, while its other South Korean  assets include non-performing loan portfolios and real estate assets for an undisclosed value.

The stake sale took place after it cancelled a $7.3 billion deal last year to sell KEB to Kookmin Bank, South Korea's top lender, due to legal proceedings.

South Korean 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. 

Grayken said earlier this month in an interview with Korean media that it could sell KEB shares before any court ruling.

South Korea's national pension fund, managing 200 trillion won, agreed with Grayken's view, showing interest in KEB. A financial regulatory official also told Reuters on Thursday there were still a number of investors lined up to buy the Korean lender, including Kookmin and Hana Financial Group.

UBS valued Lone Star's shares in the Korean bank at $6 billion in a recent report.
'Regulatory Risk'

Lone Star also faces a tax probe into last week's sale of two South Korean firms, Kukdong Engineering and Construction, and STARLease, as authorities seek to tax the combined $1 billion deal.

But Grayken said there were no South Korean taxes due on the deals, citing a tax treaty between South Korea and Belgium where Lone Star's office for global M&A investments is based.

Lone Star has filed several complaints against the National Tax Service of South Korea and submitted them to the tax tribunal here, but no decision on them has been made yet, he added.

When asked about the impact of Lone Star's situation in South Korea on foreign investors, Grayken pointed to the existence of what he called a "regulatory risk" in South Korea.  "For example, public mood appears to prompt proposals to change laws quickly and apply them retroactively," he said. 

Prosecutors probed Lone Star's 2003 purchase of KEB after a parliamentary panel voted for the move on the heels of separate investigations into possible tax irregularities at Lone Star and other foreign funds early in 2006.

However, Grayken also acknowledged that his fund could have handled the KEB situation differently. 

"Now I can see that people had serious questions that deserved a response. I admit that while Lone Star has broken no laws, we did break what you could call the cultural law that is unwritten in the way we responded. I regret that."