HSBC agreed to buy 51% of Korea Exchange Bank from private equity firm Lone Star for $6.3 billion, in a deal that could propel the UK-based bank into the top ranks of Asia's third-largest banking market.
If it overcomes complex legal hurdles and secures government and regulatory approval, Monday's deal will mark Lone Star's exit from a controversial purchase and allow it to more than quadruple its initial investment in KEB.
For HSBC , which has tried repeatedly to buy a bigger presence in South Korea, the deal will boost its clout after peers Standard Chartered and Citigroup became key players by buying local rivals.
But the protracted legal tussle over the 2003 acquisition of KEB -- which led Lone Star to scrap a $7.3 billion deal with local bank Kookmin last year and prompted another buyer to end talks -- could again throw a spanner in the works.
"The offered price is very high. But the real key is whether the government will approve it," said Hana Daetoo Securities analyst Han Jeong-tae. "For domestic banks such as Kookmin, the deal is a strategic miss and they have to hurry up and change their strategies."
HSBC, which first confirmed talks with Lone Star two weeks ago, said the purchase was conditional on receiving necessary approvals by April 30, 2008. The price will increase by $133 million if the deal is completed after Jan. 31, 2008.
Finance Director Douglas Flint was optimistic HSBC would be able to secure the deal within the eight-month framework. "We believe we have the credentials to put ourselves in a very favourable light," he told Reuters.
Too Keen for Korea?
The deal -- at a time when turbulence in capital markets is putting acquisition activity on ice across the financial sector -- would be the second-largest in South Korea's financial sector, after Shinhan Financial Group's $7.2 billion acquisition of LG Card in 2006.
HSBC has bounced back from its first-ever profit warning this year to become one of the most resilient banks amid recent jitters and the bank said on Monday it "will and can" pay for the $6.3 billion deal from its own resources.
Europe's largest bank brushed off concerns that, after missing out on big Korean deals in the past, it was overpaying for KEB. The KEB stake has a market value of $5.1 billion -- at least $1.2 billion below Monday's offer.
"We are very comfortable with the price and we think it is fair to all parties," HSBC's Flint said. "The price that we are paying is comparable to other transactions (in Korea)."
The acquisition price corresponds to 17,930 won per share, around 11.7 times KEB's forecast earnings based on Reuters data, above the multiple of 9 for Kookmin and the sector average. But on book value, HSBC's offer is in line with recent deals.
HSBC, which says it expects KEB to boost its earnings in the first full year of ownership, is paying 1.8 times KEB's book value, compared with 2 times for Citigroup's purchase of the former KorAm Bank in 2004 and 1.9 times for StanChart's acquisition of the Korea First Bank in 2005.
Strong Commitment
To secure KEB, HSBC could still face arduous regulatory proceedings. Local analysts said that by agreeing to buy the stake before a final ruling and without knowing how long the process will take, HSBC had shown a strong commitment to Korea which could help sway the watchdog.
South Korea's Financial Supervisory Commission reiterated on Monday that it would not approve the sale of the stake until all legal issues surrounding it had been resolved.
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 in 2003 for around $900 million less than it was worth.
The allegation is being reviewed by a Seoul district court. In a separate hurdle, HSBC could also see other suitors, including heavyweight Kookmin, stepping back into the ring before the deal closes in up to eight months' time.
"We cannot help but monitor the situation as we have said we are interested in KEB," a Kookmin spokesman said after Monday's news. HSBC did not comment on the risk of a bid battle.