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This page is graphically intense with long load times due to photos. However, the photos and narratives by the men who served at Osan Air Base makes the wait well worthwhile. The opinions expressed are those of the author and in no way represents any official statement of Osan AB or the USAF. 
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LONE STAR AFFAIRLone Star Affair: Four Banks Consider Courting KEB (Jan 2007) (SEE BUSINESS 2006: LONE STAR AFFAIR for details of the Xenophobic business environment created by the Roh administration.) At least four foreign banks have contacted Lone Star Funds, the majority shareholder of Korea Exchange Bank (KEB), to take over the bank since the buyout fund canceled its contract with Kookmin Bank in November 2006, a source said. Among the potential buyers are the Industrial and Commercial Bank of China (ICBC), China’s largest lender; the Bank of America (BOA), the largest lender in the U.S.; and Singapore’s DBS Bank.Supposedly Chinese banks have offered higher bid prices than Kookmin offered with their bid prices reaching possibly $7 billion. The stock price of KEB on 11 Jan rose to 650 won, or 5.35 percent, to 12,800 won on the news that foreign lenders were seeking to acquire the bank. KEB and Lone Star refused to comment on the news. Lone Star, which holds a 64-percent stake in KEB, has hinted at recovering its investment after prosecutors blocked the sale. Prosecutors called the fund’s acquisition of the bank in late 2003 illegal. Analysts say it will take one or two years before the court delivers a final verdict on the case. ``There has been speculation that the fund is taking steps to find a new buyer for KEB, but it will be a time-consuming process,’’ an analyst in Seoul said. ``Lone Star may deal with foreign banks for the KEB sale, but their bids may be blocked again by prosecutors.’’ Even if a bid goes through, it will also be very hard for a foreign buyer to win approval from regulators, who are concerned about growing foreign stakes in banks, the analyst said. There are some local players, including Hana Bank, who are interested in taking over KEB, but given the worsening public sentiment toward Lone Star and the legal battle, it is unlikely that they will make a move. Kookmin Bank President Kang Chung-won earlier said the bank is eager to bid for KEB again. The KEB is still a very attractive acquisition item for many banks, said Kim Jung-ho, an executive at Woori Private Equity. ``Banking is a profitable business, in which a stable margin is guaranteed by the government. The KEB also has stakes in Hynix and Hyundai Engineering & Construction, which will be put up for sale,’’ Kim said. He said KEB is expected to make fat profits for a couple of years to come. The fifth-largest South Korean lender has created teams to attract more foreign investment and to support growing overseas real estate investments by South Koreans. It now has 325 retail outlets in Korea and 26 overseas, and plans to set up some 20 new outlets this year. While other Korean lenders aggressively expanded business last year, the KEB, mired in prosecutors’ investigations, kept a low profile. Its loans increased 9 percent, less than Woori Bank’s 32 percent, Hana Bank’s 28 percent and Kookmin Bank’s 10 percent. (Source: Korea Times .) Lone Star Executive Indicted for Stock Manipulation (Jan 2007) Yonhap News reported that South Korea's state prosecutors office said it had indicted the head of U.S. equity fund Lone Star's local branch on charges of stock manipulation and tax evasion on 25 Jan. The prosecution charged Yoo Hoe-won with conspiring with other executives in late 2003 to spread unfounded rumors about a reduction of capital by Korea Exchange Bank's (KEB) credit card arm that caused prices to fall sharply. The card company was later merged with KEB, which Lone Star owned, resulting in 22.6 billion won in losses for small shareholders. State Auditors Conclude Damning Report on KEB Sale (Mar 2007) The Board of Audit and Inspection on 12 Feb released a damning report on the 2003 sale of Korea Exchange Bank to the offshore investment firm Lone Star, describing it as “a flawed decision made improperly.” It said in principle there were enough grounds to annul the sale. But since the BAI's decision is NOT legally binding, the Financial Supervisory Commission will have the final say whether to strip Lone Star of its status as majority stakeholder. A criminal case against former KEB President Lee Kang-won and former director-general of the Finance Ministry's Financial Policy Bureau Byeon Yang-ho is still pending in court, auditors said, and the FSC needs to take everything into consideration before making a decision. : The state audit body also told the CEO of the Export-Import Bank of Korea to sue for damages against officials of Morgan Stanley who underestimated the value of KEB when the U.S. bank was an advisor on the bank's sale. Export-Import Bank of Korea sold its stake to Lone Star in the 2003 deal. In an interim report last year, the BAI said some officials at the Finance and Economy Ministry and the financial supervisory body exaggerated KEB’s troubles by underestimating the bank's BIS capital adequacy ratio, thus allowing the sale to Lone Star, which would not otherwise have qualified to take over a Korean bank. But controversy will likely continue over the audit report, which says the decision on the W1.4 trillion sale ($1=W1,176 at the time) was made by the KEB president and a mid-level bureaucrat at the Finance Ministry. Already there are complaints that the BAI failed to find concrete evidence whether there was any illegal lobbying on the part of Lone Star. State auditors said the questions will be answered during the court proceedings. (Source: Chosun Ilbo.) Lone Star Rejects Findings in KEB Probe (Mar 2007) The offshore investment firm Lone Star on Wednesday rebuffed a damning report on its takeover of Korea Exchange Bank by the Board of Audit and Inspection, calling it “impossible to accept.” The BAI this week published its findings saying Lone Star’s 2003 takeover of KEB at a knockdown price was “flawed” and “illegal” due to massive manipulations by the bank and finance officials. In a press release Wednesday, Lone Star chairman John Grayken rejected the results of the BAI probe that Korean government officials and a former KEB president conspired to make the bank's financial troubles look worse than they really were to finagle the sale to a bidder who would not otherwise have qualified. Grayken said the bank’s BIS ratio, which represents its financial soundness, “was not too low, it was actually too high. We know this because the loan loss provisions that were actually required” would have lowered the ratio below the level projected before the purchase. According to him, the purchase was thus an expensive deal, considering that the firm set aside an extra W1.4 trillion (US$1=946) in allowance for bad debts after the takeover. “Ironically even if (we accept) the BAI's allegation that the BIS ratio was lowered as a result of a conspiracy and that approval of the sale of KEB to Lone Star was therefore inappropriate, the Financial Supervisory Commission's remedy would be to order Lone Star to sell its stake in KEB to below 10 percent, and this is exactly what Lone Star has stated it intends to do and has been prevented from doing because of the ongoing controversy.” (Source: Chosun Ilbo.) Trial opens in Lone Star stock manipulation case (Mar 2007) On 26 Mar prosecutors denounced a U.S. private equity fund for manipulating stock prices in the controversial takeover of Korea Exchange Bank in 2003, while the fund’s attorney accused the prosecution of conducting what it called a targeted probe of foreign capital. “It is a carefully premeditated crime of stock manipulation involving American executives of Lone Star and Yoo Hoe-won, who is well versed with situations in South Korea,” prosecutor Lee Dong-yeol said in his opening statement at the trial. Defense attorney Chang Yong-kook asserted that Mr. Yoo, the head of Lone Star’s Seoul office, was victimized by the Dallas-based investor. Mr. Yoo is charged with manipulating the stock price of KEB’s credit card unit in November 2003 so that the company would cost less to purchase. Lone Star’s vice chairman, Ellis Short, and general counsel, Michael Thomson, are accused of colluding in the scheme. The credit card firm was later merged with the bank, resulting in about 22.6 billion won ($24.4 million) in losses to its smaller shareholders, prosecutors said. Lone Star has also been under investigation since March last year over allegations that KEB’s value was deliberately underestimated to help the fund purchase a majority stake in the troubled bank at a bargain price. Investigators are seeking to take custody of the two U.S. nationals along with Steven Lee, former head of the company’s Seoul office, over their role in the takeover process and the stock manipulation charges under an extradition treaty with Washington. Mr. Yoo was also accused of perjury to avoid a parliamentary inquiry into the takeover case in October 2004 and breach of trust charges through the manipulation of earning rates of funds and sales of dishonored bonds at below-market prices. He has denied the charges against him. The next court date was set for April 23. (Source: Joongang Ilbo.) Parliamentary committee adopts resolution on canceling Lone Star's KEB purchase (Mar 2007) A parliamentary committee on 30 Mar adopted a resolution calling for the cancellation of a U.S. private equity fund's purchase of Korea Exchange Bank (KEB) in 2003 and the punishment of officials involved in the deal. The National Assembly Legislation and Judiciary Committee took the step after the country's audit agency and prosecution found Lone Star's acquisition of KEB "improper" and concluded the bank's financial soundness had been misstated to clear the way for the takeover. The U.S. firm has rejected the findings. The committee said in the resolution, "(The government) unfairly approved the purchase even though Lone Star had violated pertinent bank laws and was not qualified for the takeover." The resolution said 11 officials were punishable, including then Vice Finance Minister Kim Seok-dong and Yang Cheon-sik, chief of Korea EXIM Bank at the time of the 2003 deal. Lone Star Funds bought a 50.5 percent stake in KEB for 1.4 trillion won (US$1.48 billion). (Source: Hankyoreh News.) Groups allege Lone Star is in violation of banking law due to its holdings (Mar 2007) Major South Korean civic organizations said that Lone Star is holding shares of Korea Exchange Bank (KEB) in violation of banking law. According to the law, a non-financial fund cannot have shareholder voting rights if it owns 4 percent or more of a bank's stake. Lone Star, a U.S. private equity fund, was originally not eligible to be a majority shareholder of any bank in South Korea, according to a domestic law stipulating a ban of non-financial institutions from acquiring a South Korean bank. But based on an exception clause applied under emergency circumstances, namely, financial troubles at KEB, Lone Star became KEB's largest shareholder in October 2003. It currently holds 64.62 percent of KEB's shares, and retains shareholder voting rights equivalent to that percentage. However, according to rules set forth by another article of the same banking law, Lone Star could be judged as a non-financial fund, and thus not eligible for shareholder voting rights due to its large share of KEB. Under the law's article, investors are deemed to be a non-financial fund if they invest more than 25 percent of their assets or more than 2 trillion won (US$2.13 billion) into non-financial sectors. This regulation is aimed at keeping Korea 's financial sectors independent from direct control from large conglomerates, which in Korea are largely involved in the manufacturing or service sectors rather than the financial sector. The Solidarity for Economic Reform and the People's Solidarity for Participatory Democracy commented on Lone Star's holdings of KEB while taking part in a general meeting of KEB shareholders on March 29. PSPD director Kim Sang-jo said, "It is easily predicted that Lone Star's assets in non-financial companies total more than 2 trillion won. If so, regardless of whether or not the Financial Supervisory Commission (FSC)'s approval for Lone Star's takeover of KEB violated the law, Lone Star's more-than-64-percent stake in KEB is against the law. Therefore, Lone Star's shareholder voting rights should automatically restricted within 4 percent and the U.S. fund should sell its excess shares immediately," added Kim. As the controversy surrounding Lone Star's purchase of KEB has focused on other alleged illegal transactions, the fund's ownership in shares of the bank has been overlooked. In response, KEB Chairman Robert Fallon said that Lone Star was approved to invest in KEB by South Korean authorities. Therefore, Lone Star is guaranteed shareholder voting rights, he added. An FSC official said, "Just as in foreign large shareholders of other domestic banks, the FSC has already confirmed Lone Star's eligibility as KEB's majority shareholder and continues to confirm it upon every financial quarter." But in order to confirm the overseas investments of Lone Star, the watchdog authority receives data from the company itself, as opposed to other foreign majority shareholders of financial companies in South Korea , such as CitiBank and SC First Bank, which have their overseas investments confirmed by watchdog authorities based in their respective countries. (Source: Hankyoreh News.) Lone Star wins appeal vs. Seoul : Court says $27 million in tax, penalties should be scuttled (Apr 2007) On 6 Apr, Lone Star Funds won an appeal against the city of Seoul’s decision to charge it 25.2 billion won ($27 million) in taxes and penalties. The Seoul Metropolitan Government should scrap the imposition of the taxes, the Seoul Administration Court ruled on April 6, according to a statement on the court Web site. The Seoul government can make a counter appeal to a higher court within 14 days. Choi Chang-jay, head of the government’s Tax Collection Division, said on 10 Apr, the government will decide its position later. The Seoul government issued an invoice in June last year to Lone Star for 25.2 billion won for property registration and 194 million won in equity-related taxes involved in the purchase of a 45-story building in 2001. Lone Star made appeals in August. Under Seoul’s tax laws, companies incorporated for more than five years pay lower registration taxes on properties they acquire in the city, Lone Star said. The office complex was purchased by Lone Star’s Star Tower Corp. subsidiary, which had been incorporated for more than five years when the transaction was made, Lone Star said earlier. Lone Star said the acquisition complied with local tax laws and it paid all necessary taxes related to the purchase of the Star Tower office building. Seoul city officials audited the transaction in 2003 and decided additional taxes weren’t due. The Seoul government can ask for additional taxes on the registration of a building within five years of the transaction if it finds irregularities, Shin Si-sup, then-head of the government’s Tax Collection Division, said in June. The city contends Star Tower was inactive before the transaction and should pay the higher taxes typically imposed on a newer company, Lone Star said. (Source: Joongang Ilbo.) Lone Star Funds Trial for Stock Manipulation (Apr 2007) Lone Star Funds representatives returned to a Seoul courtroom on 23 Apr, charged with stock manipulation by prosecutors that have frustrated the $13 billion U.S. buyout firm's attempt to reap a fivefold return on its investment in Korea Exchange Bank. Prosecutors allege Lone Star, Korea Exchange and Paul Yoo, who heads the Dallas-based firm's Korean business, drove down the price of a credit card unit in 2003 before the bank absorbed it, according to filings at the Seoul Central District Court. The defendants denied the charges at an initial hearing last month. Lone Star founder John Grayken scrapped a $6.8 billion sale of Korea Exchange in November 2006 after probes he said were driven by an "anti-foreigner" political climate. The firm's two-year struggle to sell the bank has soured global interest in Asia's third-biggest economy, where acquisitions by overseas buyers fell by half to $3.6 billion in 2006, data compiled by Bloomberg show. (Source: Korea Herald.) Lone Star is the first overseas buyout firm to be indicted by prosecutors in Korea and the court battle is the first for the 12-year-old firm, which became the biggest investor in Korea's financial industry. Hermes Pensions Management Ltd., which runs the largest U.K. pension account, was cleared by a Seoul court of stock manipulation charges in September 2006. The Turmoil Continues: Lone Star Still Seeking to Sell KEB (Jun 2007) U.S.-based investment fund Lone Star is still continuing its efforts to sell a controlling stake in Korea Exchange Bank. The fund, if possible, may sell South Korea's fifth-largest lender before a Seoul court rules on the legality of its acquisition of the bank in 2003, Lone Star Chairman John Grayken said in an interview with Yonhap News Agency on 9 Jun. He said the fund has been in talks with Singapore's DBS Group Holdings Ltd. over the sale of Korea Exchange, but there has not been progress in the negotiations. Grayken said it is difficult to say "when" the fund will sell Korea Exchange, but it may be possible to sell the bank this year if "conditions" are good. In 2003, the U.S. equity fund bought a 50.5 percent stake in KEB for 1.4 trillion won (US$1.5 billion). The fund signed an agreement in May 2006 to sell its increased 64.62 percent stake to Kookmin Bank, South Korea's top lender. However, in November 2006 the fund stopped the deal, which was expected to give it a profit of more than 4 trillion won, citing the Seoul prosecution's investigation into the alleged illegality of its takeover of Korea Exchange. The Seoul court is assessing whether there was any wrongdoing by Korean government officials and former bank officials involved in the sale and an allegation that Korea Exchange's financial strength was deliberately underestimated to facilitate the bank's sale to Lone Star. (Source: Yonhap News.) Lone Star sells 13.6 pct stake in Korea Exchange Bank (Jun 2007) Lone Star Funds said on 22 Jun that it had sold a 13.6 percent stake in Korea Exchange Bank (KEB) for 1.19 trillion won (US$1.28 billion) through a block sale. Lone Star Funds, previously holding a 64.62 percent stake in South Korea's fifth-largest lender, sold 87.7 million KEB shares for 13,600 won each to international and local financial investors. "The purpose of this sale was to pay down debt,”said LSF Chairman John Grayken.“Lone Star still owns 51.02 percent of KEB and will continue to hold this investment for sale to a strategic investor.” "We are actively looking for a strategic investor who can take KEB to the next level,”he added. The sale price was set at a 6.8 percent discount from Thursday's closing price of 14,600 won. KEB shares closed down 3.42 percent at 14,100 won on the Seoul bourse. Combined with 354.2 billion won worth of Lone Star Funds received in dividends in February, it has so far recouped 1.55 trillion won, or 71.8 percent of its total investment in KEB. The firm bought a 50.5 percent stake in the lender for 1.4 trillion won in 2003, and invested 2.2 trillion won in KEB in May last year. Hana Financial Group, the nation's No. 3 financial services group by assets, and the National Agricultural Cooperative Federation (Nonghyup) said that they participated in the block sale. Each bought less than 1 percent of the shares offered by Lone Star Funds. The nation's top lender, Kookmin Bank, and Singapore's DBS Group Holdings Ltd., which had held talks to buy KEB, said they did not participate. The sale comes less than two weeks after Lone Star Chairman John Grayken told Yonhap News Agency that the fund may sell KEB before a Seoul court rules on the legality of its acquisition of the bank. The Seoul court is assessing whether there was any wrongdoing by South Korean government officials and former bank officials involved in the sale. They are also looking into an allegation that Korea Exchange's financial strength was deliberately underestimated to facilitate the bank's sale to Lone Star. In the midst of the legal dispute, the buy-out funds' talks with two prospective buyers fell apart. Lone Star Funds signed an agreement in May last year to sell all its shares to Kookmin Bank. However, in November last year the fund stopped the deal, which was expected to give it a profit of more than 4 trillion won, citing the Seoul prosecution's investigation into the legality of its takeover of Korea Exchange. Earlier this month, DBS Group Holdings said it withdrew from talks with Lone Star Funds over acquiring KEB. (Source: Yonhap News.) ROK Media: Lone Star May Get Away Scot-Free (Jun 2007) The offshore investment firm Lone Star is likely to slip out of Korea quietly without paying any tax from selling its stakes in Korean firms worth W2.15 trillion (US$1=W937). The fund has apparently been scaling down its investment in Korea by selling off its stake in Kukdong Engineering & Construction Co., STARLease Co., and a 13.6 percent stake in Korea Exchange Bank on June 21 and 22. Since the U.S. firm is for the purpose of these transactions based in Belgium, it will probably be spared capital gains tax due to a dual taxation agreement between Seoul and Brussels. The National Tax Service says Lone Star held and sold its stake in the three Korean companies through Belgian subsidiaries called LSF-KEB Holdings, KC Holdings and HL holdings. The NTS slapped W140 billion in 2005 on Lone Star’s earnings from the sale of the Star Tower building in Seoul, also through a Belgium-based company, Star Holdings. At the time, the NTS, following the Finance ministry's decision to ignore a double taxation agreement with Belgium since the firm is deemed to be a paper company without any substantial role in the Korean investment, applied a taxation agreement with the U.S. instead, referring to an exceptional provision that Korea can levy taxes on earnings from stock transactions by a company in which real estate accounts for more than 50 percent of its assets. The NTS is now considering taxing Lone Star by proving that Lone Star Korea, the fund’s Korean branch, played the key role in the sale of Kukdong Engineering and Construction, which would make Lone Star a de-facto resident company. In a parliamentary hearing to confirm his nomination last July, NTS Commissioner Jeon Goon-pyo expressed confidence that Lone Star can be taxed on its stellar earnings. But it is proving far from easy to show that Lone Star has a place of business here since offshore funds including Lone Star make major decisions at their headquarters. An NTS official admitted the agency is finding it difficult to tax Lone Star. (Source: Chosun Ilbo.) (SITE NOTE: Lone Star made investments in Kukdong Engineering and Star Lease through its affiliates in Belgium, with which South Korea signed a treaty to avoid double taxation, so Lone Star is not obliged to pay taxes for the investment gains. This has been the crux all along. From the beginning the ROK knew that the Belgians would NOT renegotiate the treaty, so it was a dead issue. However, the ROK wanted its pound of flesh. Thus it manipulated the laws and changed the playing field, in violation of international agreements. Seoul City taxes were ruled unconstitutional -- but if the whole premise was to get Lone Star and other investors to desert Korea, it has succeeded admirably.) On 26 Jun it was reported that the Financial Supervisory Commission (FSC) would carry out a ``thorough'' screening on the eligibility of a new owner of the Korea Exchange Bank (KEB) if its current owner Lone Star Funds sells its controlling stake in the country's fifth largest lender. This was viewed as an indication that the regulator won't endorse Lone Star's KEB sale before a court ruling is issued on the legality of the fund's acquisition of the bank in late 2003. Lone Star Funds Chairman John Grayken has said he was looking for a strategic investor who can take over the KEB, and that the sale can be complete before the court ruling. (Source: Korea Herald.) (SITE NOTE: This again shows how the ROK government can stack the deck. South Korea's tax officials continued to dig into the fund's sale of Kukdong Engineering & Construction Co., a local builder, to a business group in Jun 2007 to tax the profits from the sale. The fund is believed to have made a combined 1.5 trillion won in profits by selling shares in Kukdong Engineering & Construction, Starlease and the Korea Exchange Bank (KEB) at the end of last month. The Seoul court is also looking into claims that there was wrongdoing by the government and former bank officials during the KEB sale to Lone Star in 2003. The U.S. fund says it is looking for strategic investors for its remaining 51.02 percent stake in KEB, speeding up its move to dispose of its investment in South Korea before the Seoul court rules on the case.) S. Korea rejects Lone Star's tax appeals (Jul 2007) On 5 Jul the National Tax Tribunal rejected three appeals by the U.S. fund Lone Star against W101.7 billion (US$110.7 million) in punitive taxes on the profits from its sale of the Star Tower Building in Seoul (US$1=W938). Lone Star bought the building for W663.2 billion in June 2001 and sold it for W930 billion in December 2004, earning W296.8 billion in profits. Lone Star paid no taxes on the transaction at the time but was slapped with a W101.7 billion bill by the National Tax Service as a result of a tax probe in 2005. Lone Star Funds filed the complaints in March 2006 against the tax authorities' decision to impose the back taxes on the fund's gains from the 900 billion won ($979.3 million) sale of the Star Tower building in December 2004. Lone Star submitted the appeal, arguing that it is exempt from the taxes since its Belgium-based Star Holdings conducted the sale. Seoul and Belgium have signed a double taxation avoidance agreement. In March 2007, Lone Star appealed, saying Star Holdings was a bona fide company and therefore Korea's dual taxation treaty with Belgium should apply. At the time, the NTS said Star Holdings, the Belgium-based firm that held the Star Tower stocks, was a paper company, so it decided to consider Lone Star a U.S. company and applied a provision in the Korea-U.S. taxation treaty. The NTT said Star Holdings is a conduit or paper company founded for the purpose of avoiding tax, carries out no normal business activities, and has no substantial governance and management rights over income. Lone Star is now threatening to sue in a Korean court. "We have decided unanimously to turn down Lone Star's appeals," the National Tax Tribunal said in a statement. "We have concluded that the fund's Belgian unit has been set up primarily to avoid taxes, not to do normal business activities." Lone Star said it would appeal the ruling in the Korean courts. "Lone Star respects the National Tax Tribunal's view but is disappointed in this decision and will appeal it in the Korean courts," the fund said in a statement. The tribunal's decision could widen the ongoing friction between the Dallas-based fund and South Korea's government. (Source: Hankyoreh News and Chosun Ilbo.) (SITE NOTE: With the latest tax ruling, I wonder how Korea would react if foreign countries applied the same rules to ROK corporations that are setting up operations overseas. It would be interesting to hear their squeals of foul play and their protests in the media. But it'll never happen...I think.) Lone Star Confirms Talks With HSBC on KEB Sale (Aug 2007) U.S. private equity fund Lone Star confirmed that it has been in ``exclusive talks” with London-based HSBC to sell its controlling stake in Korea Exchange Bank. HSBC Holdings Plc said its flagship subsidiary, Hong Kong and Shanghai Banking Corp., is in talks with Lone Star to buy a majority stake in South Korea's fifth-largest lender. HSBC said if an agreement is reached, the transaction would be conditional on obtaining the necessary regulatory approvals in Korea and elsewhere. In June, Lone Star sold a 13.6 percent stake in KEB for 1.19 trillion won ($1.26 billion) through a block sale and said it is looking for strategic investors for its remaining 51 percent stake in KEB. Lone Star, which bought a 50.5 percent stake in KEB in 2003 and later increased its holdings to 64.6 percent, scrapped a $6.8 billion deal to sell its whole stake in KEB to the country's top lender Kookmin Bank in November last year amid legal disputes. A Seoul court is assessing whether there was any wrongdoing by South Korean government officials and former bank officials involved in the sale of KEB in 2003. The court is also looking into an allegation that KEB's financial strength was deliberately underestimated to facilitate the bank's sale to Lone Star. The Seoul Central District Court is currently reviewing Lone Star's alleged violation of the Securities Law in 2003. However, sources close to the deal said HSBC may sign a memorandum of understanding with Lone Star to acquire KEB as early as late this month. HSBC conducted a due diligence on KEB in early July to start price negotiations with Lone Star, they said. HSBC launched unsuccessful bids to buy Korea First Bank in 1998 and Seoul Bank in 1999 in the wake of the Asian financial crisis. Last year, the bank said it was not interested in participating in merger deals in South Korea and instead would pursue ``organic growth’’ to increase its presence by establishing a local subsidiary. (SITE NOTE: Comically, the local banks cried foul claiming that Lone Star "misled" them into thinking that it would reopen its bids to local banks after its tax troubles were resolved.) NTS Launch Second Tax Probe (Aug 2007) The National Tax Service has launched a fresh probe of the U.S. private equity fund Lone Star, this time over the sale of its stake in Kukdong Engineering & Construction and StarLease. Lone Star said NTS officials carried out a 13-hour raid of its office in Yoeksam-dong, Seoul, on 22 Aug. They seized documents on the sale of Kukdong Engineering & Construction, the company said. This is the second tax probe of Lone Star since 2005. After the 2005 investigation, the NTS slapped Lone Star with W140 billion (US$1=W941) in fines and additional taxes for profit gained from the sale of the Star Tower Building in Seoul. In the latest probe, the NTS hopes to review ways to tax the offshore fund for its gains of W1.5 trillion from the sale of stakes in Kukdong, StarLease and Korea Exchange Bank. But Lone Star chairman John Grayken told Reuters his firm owed no Korean taxes on recent deals here, citing a dual taxation treaty between Korea and Belgium, where Lone Star's subsidiaries for global mergers and acquisitions are based. “While we are disappointed by yet another unannounced raid of our offices, we are committed to cooperating fully with their investigation,” he said. (Source: Chosun Ilbo.) Tax Service faces lawsuit as Lone Star fights back (Sep 2007) On 28 Sep Lone Star Funds filed a lawsuit against the National Tax Service, demanding that the authority rescind its decision to slap a tax on the U.S. private equity firm’s gains from selling the Star Tower office building in southern Seoul, the Seoul Administrative Court said. “Lone Star claims that it is not subject to the tax payment on the Star Tower sale because the sale was carried out by its Belgium operation and is under the protection of the Korea-Belgium tax treaty,” said a spokesman for the court. Lone Star’s Seoul office declined to comment. Insight Communication, a PR firm hired by Lone Star’s U.S. headquarters, said it could not offer further information. Lone Star purchased Star Tower, now renamed the Gangnam Finance Center, in 2001 for 620 billion won ($677 million), and sold it to the Government of Singapore Investment Corp. for 900 billion won in December 2004, turning a profit of 280 billion won. The deals were conducted by Star Holdings, a Belgium-based operation of Lone Star. Korea’s tax authority imposed a 61.3 billion won tax on the profits from the sale, based on the rationale that Star Holdings is a paper company established for the purpose of evading taxes. Lone Star filed an appeal against the measure, but the National Tax Tribunal turned it down in July. However, Lone Star has consistently argued that Korea and Belgium have a double-taxation avoidance agreement. “According to the treaty Korea has with Belgium the tax on the gain from the sale of the shares is taxable in Belgium, not Korea,” the fund said in a recent release. The National Tax Service raided Lone Star in late August to probe the recent sale of its stake in Kukdong Engineering & Construction and Star Lease. The authority has been looking into ways to levy taxes on the equity fund for its 1.5 trillion won in capital gains from the sell-off of its stakes in Kukdong E&C, Star Lease and Korea Exchange Bank. (Source: Joongang Ilbo.) Court upholds taxes for Star Tower deal (Nov 2007) A ruling in a tax case on 7 Nov by the Seoul Administration Court contrasts sharply with an earlier judgement by the court on the use of paper companies to avoid acquisition taxes in the course of business deals. The courtsaid it was fair for the Gangnam District Office to levy an acquisition tax on the Government of Singapore Investment Corporation for its December 2004 purchase of Star Tower, currently known as the Gangnam Finance Center, in southern Seoul, from U.S. private equity firm Lone Star. The Singaporean company used two paper companies to complete the transaction, with neither holding fully 51 percent of the property. Under Korean law, a company buying more than 51 percent of an asset is subject to acquisition tax as the “controlling shareholder.” The Gangnam District Office slapped a 17 billion won ($18.7 million) acquisition tax on the deal, reasoning that the two firms were merely paper companies that were not officially in operation, and that the Singaporean government company was the controlling shareholder. The Seoul court said, “As the mother company has full control of its two subsidiaries, the legal liability for share acquisition [in Star Tower] will go to the Government of Singapore Investment Corporation.” The verdict contrasts with a judgement made on Oct. 31, 2006 in which the same court found that Ocmador Pacific B.V., based in the Netherlands, was not subject to an acquisition tax despite acquiring ING Korea Property using two paper companies to each hold 50 percent of the asset. The Jongno District Office imposed an acquisition tax of 2 billion won on the deal and the company filed suit against the measure. The court favored Ocmador Pacific. It said, “Defining those subsidiaries as paper companies simply aimed at illegally saving taxes is hard.” (Source: Joongang Ilbo.) Appeals court says Lone Star owes $27 million: Tax ruling favors Seoul government and overturns a previous decision (Dec 2007) On 5 Dec, the Korean appeals court overturned a lower court ruling and ordered the U.S.-based Lone Star Funds to pay the city of Seoul 25.2 billion won ($27 million) in taxes and penalties. The Seoul High Court made the ruling. Kim Ji-ho, a Seoul-based spokeswoman for Lone Star, declined to comment. Lone Star is allowed to appeal the ruling, the government said. Lone Star filed a lawsuit against the city last August, arguing that additional taxes it slapped on its purchase of a 45-story building in 2001 were unreasonable. Under Seoul tax laws, companies incorporated for more than five years pay lower registration taxes on properties they acquire in the city. The office complex was purchased by Lone Star’s Star Tower subsidiary, C&J Trading, which had been incorporated for more than five years when the transaction was made. The company was established in 1996 but has shown no business transactions since then. Lone Star bought the firm in 2001. The Seoul government said it was due the additional taxes in June 2006 because Star Tower was inactive for a period before the transaction. That means the higher tax rate applies to Lone Star. The Seoul Administration Court ruled April 6 that Seoul had no claim to the taxes. The city appealed the ruling. Lone Star is party to other disputes with the Korean government related to the purchase of the Star Tower property. The U.S. buyout fund is also in a legal battle with prosecutors over the purchase of a controlling stake in the Korea Exchange Bank in 2003. The head of the Financial Supervisory Service said in an interview with a foreign media outlet in November that it would rule this month on the long-standing dispute over whether Lone Star Funds is the legitimate majority shareholder in the bank. A decision that Lone Star is not the lawful owner could imperil the fund’s planned sale of a 51 percent stake in KEB to HSBC, Europe’s biggest bank, for $6.3 billion. (Source: Joongang Ilbo.) HSBC Asks for Approval for KEB Takeover (Dec 2007) British banking group HSBC has asked the Financial Supervisory Commission to approve its deal to buy Korea Exchange Bank from offshore private equity fund Lone Star. Hong Young-man, a spokesman for the FSC, said in a briefing on 20 Dec that HSBC submitted the application for approval on 17 Dec, some three months after HSBC signed the deal with Lone Star in September. Hong said the financial regulator will send the bank a letter stating that it will review the application after the ongoing Lone Star legal case is resolved. Prosecutors allege that Lone Star paid an artificially low price for its 2003 purchase of KEB and manipulated KEB Card's stock price. Another FSC official said that the letter will confirm the FSC's position that it cannot approve the deal before the court makes a final ruling and inform HSBC that the case may take a long time to sort out. The Lone Star case is pending in a lower court. The trial has been delayed because witnesses, including Lone Star Fund executives, have not presented themselves to the court. It is unclear when a ruling might be made. HSBC signed the deal under the condition that it can be revoked if HSBC fails to secure the Korean government's approval for the takeover by April 30 of next year. (Source: Chosun Ilbo.) Lone Star Chairman's Seoul Trip Sparks Speculation (Jan 2008) Speculation is rife about why Lone Star chairman John Grayken (52) suddenly agreed to come to Seoul on 9 Jan. The moment he landed, he was banned from leaving the country for 10 days as prosecutors summon him for questioning. Nobody can rule out that he may not be able to return to the U.S. depending on the results of the investigation into alleged irregularities in his firm’s takeover of Korean businesses. Why did he risk it? The immediate purpose Grayken is to testify at the Seoul Central District Court at 10:00 a.m. on 11 Jan for the defense of Yoo Hoe-won, the former president of Lone Star's Korean subsidiary, who is accused of stock manipulation in connection with a controversial deal involving Korea Exchange Bank's credit card unit. Soon afterwards, Grayken will go directly to the prosecutors' office for questioning. A prosecutor said, "I don't understand why he abruptly volunteered to testify, given that his testimony is not essential in the investigation." An official with the Seoul Central District Court also said, "We've accepted his request to testify although his testimony is not crucial to the proceedings." When Lone Star took over Korea Exchange Bank in 2003, Grayken did not even attend the signing ceremony in Seoul. That is why there is speculation that he is now here for some other purpose. -- Does Grayken want to meet Eldon? One plausible scenario is that Grayken has an urgent reason to meet somebody here. Some speculate he wants to meet the British financial expert David Eldon, a top competitiveness policy adviser to president-elect Lee Myung-bak, to get help with his plan to sell Korea Exchange Bank. In that scenario Lone Star, which has agreed to sell the bank to HSBC by April 30, needs Eldon's influence. Eldon, a British citizen, worked for HSBC for 37 years. Though an American, Grayken lives in London and Ireland. A bank official said, "I understand that Eldon is personally acquainted with Grayken." -- Does Lone Star need to sell KEB fast? Since Lone Star’s products are private equity funds with maturity dates, Lone Star needs to sell Korea Exchange Bank fast to prevent a liquidity crisis, some experts say. If Yoo is convicted, he will lose his qualification as the bank's largest shareholder and the sale of bank may be canceled. In that event, it is likely the U.S. government will comply with the Korean government's request to extradite three Lone Star executives -- Steven Lee, the former head of the fund’s Korea operations, Ellis Short, vice chairman of Lone Star, and the firm's general counsel Michael Thompson -- for whom arrest warrants are out. Grayken might have felt the need to fly to Korea well in advance to turn the court proceedings to his advantage. It would be a harsh blow to Lone Star if the three executives were to stand trial in Korea, and it could be impossible for the firm to sell Korea Exchange Bank. In the belief that the Lee Myung-bak administration is more business-friendly than the Roh Moo-hyun government, Grayken, observers speculate, is trying to make a good impression on the new Korean government. (Source: Chosun Ilbo.) Grayken's Testimony: Denies Wrongdoing (Jan 2008) Lone Star Funds chairman John Grayken appeared in a Seoul court on 11 Jan to testify in a case of illegal stock manipulation. Grayken testified at the Seoul Central District Court as a defense witness for Paul Yoo, the president of Lone Stars Korea unit, who is under trial for suspected manipulation of the stock price of Korea Exchange Banks credit card unit to lower its acquisition price in 2003. "I think its completely untrue. Its totally implausible my senior executive would plot to commit a crime," the 51-year-old chair said in court. Graykens testimony may put pieces together to help the court make a ruling that could allow the government to approve of Lone Stars plan to sell its 51 percent stake in Korea Exchange Bank to HSBC Holdings Plc. HSBC agreed to buy the controlling stake for $6.3 billion. Yoo is accused of spreading false information of a capital reduction to artificially cut down the stock price of KEBs credit card unit. Grayken is defending Yoo, who claims that Lone Star headquarters had discussed a possible capital reduction. Grayken had commented that acquisition of the credit card unit was a very risky investment for KEB, which was pursued because of pressure from financial regulators, Bloomberg reported. He said the Financial Supervisory Service had informed us it was our responsibility to participate in the stabilization of the financial system. (SITE NOTE: The prosecutors sought a 10-year prison sentence on 16 Jan during the trial of Paul Yoo for alleged stock price manipulation and spreading false rumors of a capital reduction of KEB. Prosecutors also asked for a fine of 4.2 billion won for the Korean representative. Yoo was indicted last year along with Lone Star for allegedly rigging the stock price of KEB's credit card unit. Grayken denied any wrong-doing on the part of Yoo and Lone Star.) A guilty verdict could threaten Lone Stars legitimacy as KEBs owner. If Lone Stars ownership status is not legitimate, regulators can order the fund to cut its stake to 10 percent or less, according to reports. According to its lawyers, it could take at least three years for a final court ruling to come through because of appeals. The controversy runs deeper than Yoos indictment. Korean prosecutors also allege the banks sale to Lone Star at an artificially lowered price involves a political conspiracy. The sale of KEB, the countrys fifth-largest lender by market value, has also sparked social controversy concerning the role of foreign funds in Korea. A series of probes have reinforced a sentiment of hostility toward foreign investors, some observers say. In November, Grayken, who founded the Dallas-based fund in 1995, said the probe is a politically motivated investigation driven by antiforeign investor sentiment that persists in certain segments of Korean society. Lone Star is the first overseas buyout firm to be indicted by Koreas prosecutors. The funds attempt to sell its KEB stake to Kookmin Bank in 2006 crumbled amid frustrations over the legal dispute. Lone Star and HSBC hope to have the deal concluded by their April deadline. (Source: Korea Herald.) Grayken Grilled -- and Prosecution extends Travel ban 10 days till 29 Jan (Jan 2008) Prosecutors questioned Lone Star chairman John Grayken over alleged irregularities in the offshore fund’s purchase of Korea Exchange Bank at a knockdown price. Grayken had been grilled for 11 hours starting on 14 Jan. Supposedly questioning Grayken took anywhere between twice to five times longer than usual "since he is a foreigner." (SITE NOTE: WHAT BULLSHIT!!!) The questioning continued each day -- 12-hours a day -- for 10 days concluding on 23 Jan. Grayken reportedly denied his company lobbied Korean government officials to purchase KEB at a rock-bottom price or conducted insufficient due diligence. He also denied stock price manipulation charges against the offshore fund's vice chairman Ellis Short and general counsel Michael Thomson. The two Lone Star executives are accused of fixing the stock price of KEB's credit card arm. Grayken claimed his firm respected the Korean stock exchange law. Meanwhile, the Wall Street Journal on 14 Jan said the Korean travel ban on Grayken “highlights risks of doing business” in Korea. Grayken arrived in Korea as a witness in a case on Lone Star’s alleged irregularities, but Korean authorities placed a 10-day travel ban on him. “Such treatment of foreign investors presents a public-relation challenge for president-elect Lee Myung-bak,” the daily comments, who was elected on a platform of economic growth and reinvigoration through more foreign investment. (Source: Chosun Ilbo.) For foreign investors, the eventual outcome of the ongoing investigation into Lone Star Funds, the U.S. investment firm, will be “a good indication of how Korea will treat other foreign investors in the future.” He warned about the case’s “significantly negative impact” on foreign direct investment. Many Koreans seem upset that Lone Star stands to make huge profits from its Korean investments and that it will not pay taxes here because of a legal tax treaty. “In the most competitive business environments, as long as you follow the law, there is no negative concept called ‘excessive profits,’” American Chamber of Commerce President Tami Overby said. The prosecution on 17 Jan extended the overseas travel ban imposed on John Grayken, chairman of Lone Star Funds, another 10 days for further questioning over alleged irregularities involving the fund's acquisition of the Korea Exchange Bank back in 2003. Grayken, who arrived on Jan. 9, was prohibited from leaving the country until Jan. 29. (SITE NOTE: It appears that Grayken is sticking to his story and the prosecution are trying to wear him down -- but can't use water torture or beatings to get a confession.) On 23 Jan it was reported that the Supreme Prosecutors' Office "cannot decide at the moment" whether to indict John Grayken. Wrapping up 10 days of questioning Grayken, prosecutors lifted the exit ban that has been imposed on him since his arrival on Jan. 9, and that was initially to expire on 29 Jan. Grayken pledged to return to Seoul when the prosecutors summon him for further questioning, but his pledge is not legally binding. If Grayken and other U.S. executives of Lone Star ignore summonses in the future, the probe may be permanently left in the dark. The prosecution did not elaborate on whether prosecutors secured evidence to prove Lone Star's lobbying allegations, though it did say that a few facts not known before had come to light. (SITE NOTE: The bottom line is that they could not shake Grayken from his story that Lone Star had done nothing wrong.) Lone Star Seeks Refund on $125 Mil Tax on KEB Sale (Jan 2008) U.S. equity fund Lone Star has filed a motion for a refund on taxes it paid in Korea last year. On selling its stake in Korea Exchange Bank last year the fund paid more than US$125 million in taxes. The National Tax Service says Lone Star paid the tax last November, 10 percent of the transaction costs of selling its KEB shares in June last year. The taxes were paid through a brokerage, the same one that arranged Lone Star's block sale of its KEB shares to 144 investors at home and abroad. Lone Star's motion is for a refund on the taxes deducted in the selling process. It claims its tax obligations with respect to the bank sale lie in Belgium, where the head office in charge of the transaction is located. (Source: Chosun Ilbo.) (SITE NOTE: It'll be interesting if the NTS turns down the refund request from Lone Star which will then place the international treaty on the table. NTS had previously ruled -- much to the dismay of international investors -- that the Belgium headquarters was a tax shelter and did not qualify for the tax shelter. This will test it in court dependent on how the NTS rules.) Lone Star Funds Guilty of KEB Stock Rigging (Jan 2008) A Seoul court ruled that Lone Star Funds was guilty of rigging stock prices in the process of merging the credit card unit of the Korea Exchange Bank (KEB) with the bank in 2003, complicating Lone Star's planned sale of KEB to HSBC. The Seoul Central District Court handed down guilty verdicts on Lone Star, KEB and Paul Yoo, head of the U.S. investment fund's Seoul office, on almost all the charges laid down by the prosecution, including stock manipulation. The court sentenced Yoo to a five-year prison term. (SITE NOTE: Bloombergs.com stated, "Lone Star Funds' South Korean country head Paul Yoo was jailed for five years for stock manipulation in a ruling that may accelerate the retreat of foreign investors from Asia's fourth-biggest economy. The Seoul Central District Court today delivered the verdict on Yoo, who was accused of driving down the price of shares in a unit of Korea Exchange Bank to buy it cheaply. Yoo, 57, said he'll appeal against the verdict. The bank dropped 5 percent in Seoul trading after the ruling. ``The court decision is likely to discourage foreign investments in Korea, where unpredictability about the legal system is raising investment uncertainties for foreigners,'' said Kim Sang Jo, a professor of international trade at Hansung University in Seoul.The ruling is expected to complicate the planned sale of the bank by the U.S. fund to HSBC. The lawsuit was part of a broader investigation into Lone Star, centering on allegations that the U.S. firm lobbied Korean government officials to exaggerate the bank's financial problems so that it could buy the bank at a price cheaper than market value. Following the court decision, the Financial Supervisory Commission (FSC) reiterated that it will not endorse the KEB sale to HSBC until the court also delivers a ruling on whether the Korean bank was deliberately sold for a less than fair price. Yoo had been indicted without physical detention on charges of intentionally driving down the stock price of KEB's credit card unit in collusion with Lone Star executives to take it over at a lower-than-market price. Yoo and Lone Star allegedly spread false rumors that a capital reduction of the unit was imminent. He was also indicted for breach of trust, tax evasion, and refusal to testify at the National Assembly. The court ordered the KEB and LSF-KEB, a Belgium-based unit which holds Lone Star's controlling stake in KEB, to pay 25 billion won each in fines. The court said they reaped 10 billion won and 12.3 billion won in benefits, respectively, through the stock rigging. ``At that time in 2003, KEB Credit Card had impaired capital and Lone Star likely wanted a capital reduction. However, the fund was aware that the reduction was unavailable at that time. But it spread the rumor in order to make improper gains by dropping the stock price, and that is a fraudulent act,'' the court said in the ruling. Lone Star said it will appeal. John Grayken, chairman of Lone Star Funds who took the stand here as a witness for Yoo last month, said in a statement that Lone Star is disappointed at the ruling and is confident that the verdict will be reversed. He said that Lone Star executives neither tried to nor actually did manipulate the stock. Grayken testified last month that he had received a report in advance about the credit card unit takeover plan which included the capital reduction, according to prosecutors. (NOTE: Grayken stated, “There is simply no credible evidence to support the court’s findings.”) (SITE NOTE: Loan Star and Korea Exchange Bank were also found guilty of stock manipulation and each fined 25 billion won ($26 million). ``We put top priority on holding a fair trial,'' said presiding Judge Lee Kyung Choon at the end of the case, which began in March last year. ``During the 30 sessions I'm sure the defendants had opportunities to fully defend themselves.'' The commentary of most blogs and myself is that "fair trial" is determined by the prevailing judgement of society -- and the outcome was set before it even began.If the ruling is upheld in higher courts, Lone Star will lose its status as the largest shareholder of KEB. The fund is holding a 51.02-percent stake in the bank, and in September signed a $6.3 billion contract with HSBC Holdings to sell it. The deal is valid until April. (Source: Korea Times.) UK's HSBC closer to control of KEB (Mar 2008) Britain’s HSBC cleared a hurdle in its $6,3bn bid for a controlling stake in Korea Exchange Bank (KEB) on 5 Mar, but final approval hinges on resolving legal disputes with stakeholder Lone Star. The favourable ruling by South Korea’s Fair Trade Commission turns the spotlight on the Financial Services Commission, which has repeatedly said it would not approve the sale of KEB shares until all issues over private equity firm Lone Star’s investment in the bank were resolved. Ku Yong-uk, a banking analyst at Daewoo Securities, said it was unlikely a ruling would happen by the April 30 deadline amid a government reshuffle. HSBC Holdings’ KEB stake purchase in the country’s sixth-largest bank is conditional on approval by the Fair Trade Commission and the Financial Services Commission by April 30. HSBC agreed last September to buy 51,02% of KEB from Lone Star in a deal that could propel Europe’s biggest bank into the top ranks of Asia’s third-largest banking market. After missing out on big deals to Citigroup and Standard Chartered, KEB is seen as an attractive option. Last month, a Seoul court found the head of Lone Star’s South Korean business guilty of manipulating the stock price of a KEB credit card unit in order to buy it cheaply. It was the first ruling in a long-running legal battle between South Korean prosecutors and Lone Star, which bought KEB for $1,2bn in 2003. (Source: Business Day.) Lone Star Verdict Bad for Investment: Foreign CEOs (Mar 2008) More than six out of every 10 CEOs of foreign-invested firms said last month's court ruling against the U.S. private equity fund Lone Star would cast a dark cloud over foreign investment in South Korea. This is the result of a survey conducted recently by the Institute of Global Management among 37 CEOs of member companies of the American Chamber of Commerce in Korea and the European Union Chamber of Commerce in Korea. According to the survey results released on 12 Mar, 62 percent of the polled executives said they feel the verdict will make it difficult for them to recommend Seoul to their headquarters as an ideal investment destination. Only 3 percent said the verdict will have a lasting positive effect. Thirty-five percent said it will have no particular effect at all. On Feb. 1, a Seoul district court found Lone Star guilty of stock manipulation in its controversial takeover of the credit card unit of the Korea Exchange Bank. Some 68 percent of respondents said they believe the guilty verdict against Lone Star was "affected by external factors rather than by the case itself." As for those external factors, 49 percent cited the "anti-foreign sentiment prevalent in South Korea." Twenty-seven percent cited the "image of Lone Star created by some media outlets as an eat-and-run vulture investor." Most of the foreign executives expressed high levels of distrust in the South Korean court system. Specifically, 60 percent said Korean courts did not compare favorably to those of advanced nations in their handling of foreign-invested firms. (Source: Chosun Ilbo.) FSC to seek 'favorable' solution to Lone Star case (Apr 2008) Korea is not against foreign businesses. This message, which President Lee Myung-bak pitched to global investors on his first trip to the United States last week, was echoed yesterday by the head of the nation'top financial watchdog. In a shift from the previous administration'position, Financial Services Commission Chairman Jun Kwang-woo said the delayed sale of Korea'fifth largest bank by Lone Star Funds will be facilitated in a way that is "favorable for all parties concerned." The attempt by the Dallas-based buyout fund to sell a controlling stake of Korea Exchange Bank to HSBC has been stalled for months. The financial authorities under the previous government refused to approve the deal, citing legal disputes involving Lone Star. Prosecutors have claimed Lone Star'acquisition of KEB in 2003 was made at an artificially low price. Foreign investors, including Lone Star, have claimed that the delay is an indication of a bias in Korea against foreigners making profits here. "There is a change in the government'stance on the sale of Korea Exchange Bank," Jun said in a press conference in Seoul. Jun returned 21 Apr after accompanying President Lee on his U.S. trip last week. "The previous government was passive, saying it would wait until the legal uncertainty is resolved," Jun said. "But we hope to find a solution as soon as possible that can benefit all parties concerned, considering the signal it could send to the international financial community and the impact it could make on fostering a global financial center in Korea." In a pending legal case, several former Korean government officials are accused of having been involved in lowering KEB'share price to sell the then-ailing bank. Lone Star has not been accused directly, but is not free from suspicion, given its confirmed involvement in a similar case. Paul Yoo, head of Lone Star'Korea operations, was convicted and jailed on Feb. 1 for five years for manipulating the stock price of KEB'credit card unit in order to acquire it cheaply. Lone Star and KEB were also found guilty of manipulation. Last December, Lone Star signed a deal with HSBC, Europe'largest bank, to sell its 51 percent stake in KEB for $6.2 billion. The deal is to expire on April 30. (Source: Joongang Ilbo.) (SITE NOTE: The trouble is going to be how to reverse all the legal precedents -- regardless of how insultingly xenophobic they were -- in this complete turnaround. If the rulings were LEGALLY reversed by the ROK, then it is possible to believe this stance as credible. However, if the previous rulings -- made by individuals still within the administration -- the action will only be eye-wash where they were forced by threats and coercion of the LMB administration. This is the dilemma...how to do it LEGALLY. If reversed by force of will, the LMB administration becomes no better than the Roh administration.) What Next for HSBC's KEB Takeover Deal? (Apr 2008) A question mark hangs over the contract for sale of Korea Exchange Bank between U.S. buyout fund Lone Star and British banking giant HSBC as a key deadline expires at the end of this month. Some Korean industry insiders say KEB has to go on the auction block again. They say the deal with HSBC, struck last September, should be scrapped since it was unfair and done without the participation of Korean banks. Small KEB shareholders on Thursday said the current terms and conditions are advantageous only to Lone Star, the largest shareholder, so the bank should be put to tender again giving domestic banks a fair opportunity. The contract between Lone Star and HSBC is private and both want to maintain its integrity, so it is improbable that anything will change. In September 2007 when they signed the contract, Lone Star and HSBC agreed on the proviso that they could scrap the deal if the Korean government does not approve it by late April this year. When the Chosun Ilbo on 24 Apr asked if they would extend the contract, senior officials of both Lone Star and HSBC said there was “no change.” A Lone Star official said, "There is no change in our belief that HSBC is the best option." An HSBC official said there was “no change in our intention to take over KEB.” They added HSBC chairman Stephen Green will soon call a board meeting to decide on the contract extension. Observers speculate that Lone Star has no reason to take the initiative to scrap the contract because it considers HSBC a safer business partner than any Korean bank, where there would be a belligerent union, controversy over a drain of national wealth and other issues. Regardless of the outcome of the ongoing trial of Lone Star, the only measure the Korean government can take is to strip Lone Star of its status as KEB's largest shareholder and order it to sell its stake in the bank, so it seems highly likely that KEB will go to HSBC one way or the other. The high court is currently reviewing the case against Lone Star over alleged manipulation of KEB Card stocks after Lone Star was found guilty in a district court. A district court will meanwhile make a decision around the end of this year on allegations that Lone Star bought KEB at a dumping price in 2003. Industry insiders predict that once the high court rules around May or June, Lone Star will forgo an appeal to the Supreme Court, the government will strip Lone Star of its status as KEB's largest shareholder and order it to sell -- which it will do, to HSBC. Kookmin Bank, which previously failed to buy KEB as a result of Lone Star's unilateral abrogation of a contract, remains sour, saying Lone Star played an unfair game, excluding domestic banks that were hamstrung by anti-foreign capital sentiment in the country at the time. Kookmin executives are calling for the HSBC deal to be scrapped and an international tender open to all domestic and foreign contenders to be called. Some experts want the government to strike a big deal with Lone Star. They say it will be hard for Lone Star to ignore a government guarantee of a safe escape for a new international bid. But that scenario could again give the impression that Seoul discriminates against foreign investors -- a tough call for a government elected on a business-friendly platform. (Source: Chosun Ilbo.) (SITE NOTE: What's the big deal? SEOUL HAS BEEN AGAINST FOREIGN INVESTORS!!! GET RID OF THE REGULATIONS FIRST AND THEN PEOPLE WILL BELIEVE THEM. STOP THE XENOPHOBIC CLAP TRAP!!! Roh may be gone, but the xenophobic mechanisms are all still in place.) KEB Sale to HSBC Delayed (Apr 2008) With Korean financial authorities showing little sign that they will give quick approval to Lone Star Funds' sale of Korea's sixth-largest bank to HSBC, the two firms extended the deal for three more months on 29 Apr, a day before a self-imposed deadline. "HSBC and Lone Star have agreed to extend, until 31 July 2008, the deadline for completion of HSBC's proposed acquisition of 51.02 percent of Korea Exchange Bank, subject to regulatory approval," said HSBC in a statement. HSBC Might Withdraw From KEB Purchase: FT (May 2008) The Financial Times reported on 26 May that HSBC was considering walking away from its long-delayed takeover of Korea Exchange Bank if the government did not approve the deal within weeks. "Sentiment is finely balanced but HSBC would likely look . . . elsewhere if there is no movement," said one person familiar with the bank's thinking, according to the newspaper. Following the report, a HSBC spokeswoman said on the phone that Simon Cooper, HSBC Korea's president and chief executive, delivered similar message. He said, "HSBC is committed to the acquisition, but we can't wait forever." It added that the British banking giant is hoping this week’s visit to the United Kingdom by senior government members including Jun Kwang-woo, chairman of the Financial Services Commission, would help break the logjam. "The delegation includes Jun Kwang-woo, chairman of the Financial Services Commission, who is expected to meet with Alistair Darling, U.K. chancellor," the report said. But the Financial Services Commission yesterday said in a statement regarding the news that Chairman Jun's official schedule does not include meeting with the chancellor. A senior official of HSBC Korea said, “HSBC still wants to acquire KEB. We are, however, hoping for positive news since FSC officials are likely to meet with HSBC during their U.K. visit.” Last month, HSBC and Lone Star Funds announced that the deadline for the purchase of a majority stake of KEB would be extended by three months until late July. A collapse of what would be the biggest foreign acquisition in Korea could hurt President Lee Myung-bak's promise to boost foreign investment. HSBC, Europe's largest bank by market value, agreed in September to buy control of Korea Exchange. (Source: Donga Ilbo and Joongang Ilbo.) Lone Star's Korean head gets suspended jail term for inflating profits (May 2008) On 2 May a Seoul court gave a suspended prison sentence to a Korean representative of U.S. buyout fund Lone Star Funds for spreading false investment information, but dismissed a more serious charge of embezzlement. Jeong Heon-ju, a representative of Hudson Advisor Korea, which performs the management of assets acquired by Lone Star Funds' local unit, was sentenced to two years in jail, suspended for three years, and fined 500 million won (US$494,000). (Source: Yonhap News.) Jeong was indicted last year. The Seoul Central District Court convicted Jeong of inflating profits to attract investors. But the judge gave a suspended sentence as the manipulation did not result in material losses for investors. The court also dismissed charges that he embezzled US$300,000 from the Texas-based company and evaded taxes. The Supreme Prosecutors' Office said it would appeal to a higher court. (SITE NOTE: A Seoul court ruled that Lone Star Funds was guilty of rigging stock prices in the process of merging the credit card unit of the Korea Exchange Bank (KEB) with the bank in 2003, complicating Lone Star's planned sale of KEB to HSBC. The Seoul Central District Court handed down guilty verdicts on Lone Star, KEB and Paul Yoo, head of the U.S. investment fund's Seoul office, on almost all the charges laid down by the prosecution, including stock manipulation. The court sentenced Yoo to a five-year prison term. These will impact investment in Korea.) Lone Star Korea Head Cleared of Stock Rigging (Jun 2008) Lone Star Korea head Yoo Hoe-won was cleared of charges of stock price manipulation at a Seoul appeals court, a ruling that could empower the U.S. equity fund to proceed with the sale of the Korea Exchange Bank (KEB) to HSBC Holdings. “There is no evidence to prove Lone Star and [Paul] Yoo are guilty of stock price manipulation,” Seoul High Court Judge Koh Eui-young said yesterday in the ruling. The court cleared Yoo of charges that he spread false rumors of a capital reduction at the KEB's credit card unit being imminent. ``Lone Star then had seriously considered reducing capital of KEB. The prosecutor's claim that Lone Star spread false rumors is not convincing,'' presiding judge Ko Yue-young said in the ruling. Yoo, the former head of Lone Star’s Korea operation, was cleared of evading 2.1 billion won ($2.03 million) in taxes. He was still found guilty of other charges including a failure to appear at a National Assembly hearing as a witness. He was also convicted of separate charges of breach of trust linked to Lone Star’s other investment deals in Korea. The court handed Yoo a suspended jail sentence of two and a half years. This reduced a lower court's sentence of five years to two-and-a-half years suspended for three years. The ruling gave hope to HSBC, which has offered Lone Star $6 billion to complete the purchase of KEB, the nation's fifth largest bank. However, it put pressure on Korean financial regulators that have been withholding approval of the sale. Korea's financial regulator immediately announced it will nevertheless withhold approval for the KEB sale to HSBC as legal proceedings are not completely over. Korean regulators have pledged the stake sale won't be approved until outstanding legal issues have been solved to a level they find acceptable. Lone Star welcomed the ruling. ``Lone Star is very gratified that the Seoul High Court has reversed the lower court's decision in the KEB stock price manipulation case, finding that Mr. Yoo and the other members of KEB's board of directors did not violate any laws in connection with KEB's rescue of KEB's credit card unit from the brink of bankruptcy,'' Lone Star said in a statement. John Grayken, Chairman of Lone Star, also said, ``We maintained our innocence throughout this process, and are pleased today to have the court's confirmation. We hope that now we can all put this behind us and get back to business.'' Dallas-based Lone Star brought a controlling stake in KEB in 2003 for $1.2 billion. It's now trying to sell a 51 percent stake in KEB to HSBC Holdings PLC (HBC) for around $6 billion. Prosecutors sought a 10-year prison sentence for Yoo on charges of driving down the share price of the card unit by spreading a rumor that a capital reduction of the card company was imminent, and allowing the bank to absorb it at below-market prices. In the first ruling in February, Yoo was sentenced to five years and taken directly to prison from the courtroom. (Source: Korea Times and Joongang Ilbo.) (SITE NOTE: It may be too late as an article on 23 Jun stated that foreign funds are pulling out of Korea. (Source: Korea Times.) Perhaps this may be the first step in Lee Myeong-bak giving the appearance that Korea is truly becoming business friendly -- instead of a xenophobic business environment. However, the big road block is the FSC -- still controlled by nationalistic progressives appointed during the Roh administration. When Lee came to office, his transition team stated: "The previous government was passive, saying it would wait until the legal uncertainty is resolved," Jun said. "But we hope to find a solution as soon as possible that can benefit all parties concerned, considering the signal it could send to the international financial community and the impact it could make on fostering a global financial center in Korea." To find the solution, they need to replace some key people in the FSC first.) The prosecution said it will appeal to the Supreme Court. The Financial Services Commission, the top financial regulator of Korea, said, yesterday it will delay a decision on approval of a pending deal between Lone Star and HSBC to trade a controlling stake in KEB. “Although Lone Star was cleared of rigging share prices related to its purchase of the KEB’s credit card unit, the legal process still remains,” the FSC said in a statement. “In this situation, it is not proper for the FSC to proceed with its regulatory process related to the KEB sale.” A high-ranking official of the FSC, speaking on condition of anonymity, said the FSC must be prudent in the Lone Star matter considering the nationalist public sentiment stirred by resumption of U.S. beef imports. The bid to sell KEB by Lone Star has also been a source of nationalistic anger as some Koreans believe the foreign firm was making undue profits. In a separate legal case, former government officials have been suspected of artificially lowering the stock price of KEB to help Lone Star purchase KEB at cheaper prices in 2003. “Any decision will be made only after the court makes a ruling on the case, not to speak of the stock manipulation case,” the official said. Many analysts say the deal between Lone Star and HSBC, with a 51 percent stake in KEB on the table for $6.3 billion, was almost doomed to fail. The deal, made at the end of last year, is scheduled to take effect on July 31, without further extension. The self-imposed deadline for getting approval was initially set to expire on April 30, but was extended by three months. “In this situation, it might be hard for us to hang on to the deal,” said an HSBC official who wished to remain nameless. If the deal breaks down, it might be a boon for Lone Star, analysts say. Local banks such as Kookmin Bank and Hana Bank are showing interest in taking over KEB, making it possible for Lone Star to raise the price. Lone Star has already recouped 85.4 percent of its 2.15-trillion-won investment in KEB. Analysts say the drawn-out deal process is not good for KEB, as it is distracting the bank from its business. “The protracted deal is impeding our bank from investment,” said a KEB official, requesting not to be named. (Source: Joongang Ilbo.) Lone Star voices commitment to selling KEB to HSBC (Jul 2008) U.S. buyout fund Lone Star Funds said on 17 Jul it is committed to selling its stake in Korea Exchange Bank (KEB) to HSBC Holdings Plc, dismissing a report that Kookmin Bank is seeking to buy KEB if the deal with HSBC falters. "Lone Star Funds has an exclusive contract with HSBC and has held no discussions with any other parties with regard to the sale of its shares of KEB. We remain committed to our agreement with HSBC," Lone Star said in a statement. The statement came as a local newspaper reported that South Korea's top lender Kookmin Bank has contacted Lone Star in a bid to buy KEB and is considering a public tender offer if the deal with HSBC breaks down. In April, British banking giant HSBC agreed with Lone Star to extend a deadline to buy KEB by three months until the end of July. But South Korea's financial regulator has yet to give the US$6.3 billion deal the thumbs-up, pending a court battle over Lone Star's takeover of KEB in 2003. The Financial Services Commission (FSC) said it will continue to delay giving its approval for the KEB takeover until all legal uncertainty clears up. (SITE NOTE: The FSC is still filled with Roh Moo-hyun appointees who are nationalistic in viewpoints -- and have aided in creating a xenophobic business atmosphere that Lee Myeong-bak is trying to reverse. The problem is how to force these appointees out legally because they refuse to leave voluntarily. The Kookmin deal would be fine with the FSC as it fits nicely into their xenophobic views of Korean business.) Market watchers said the delay of regulatory approval may lead HSBC to walk away from the deal. They said if the deal falters, Lone Star may unload its stake in KEB through a block sale which does not require approval by the regulator. Meanwhile, Kim Kwang-soo, an official at the FSC, told reporters that there have not been any kind of consultations between Kookmin Bank and the regulator concerning a possible tender offer for buying KEB. Kookmin Bank repeatedly showed its interest in acquiring KEB, after Lone Star Funds in November 2006 scrapped a deal to sell its entire stake to Kookmin Bank amid legal limbo related to its purchase of KEB in 2003. (Source: Yonhap News.) Watchdog moves forward on sale of KEB (Jul 2008) Korea’s top financial regulator said on 25 Jul that it will begin a review of the long-stalled bid by HSBC to buy a controlling stake in Korea Exchange Bank from Lone Star Funds. “We respect the contract made between Lone Star and HSBC,” said Kim Kwang-soo, a director at the Financial Services Commission, in a media briefing late yesterday afternoon. “We decided to start a review of whether to approve the bid by HSBC to take over KEB.” Kim said the FSC asked the British lender to provide updated documents that are necessary for the review. The review will officially begin as soon as the document arrives, Kim said. HSBC applied to buy KEB last December. It is HSBC’s third attempt to buy a Korean lender. Analysts say the $6.3 billion deal will likely be given the green light. They find few defects in Britain-based HSBC, the world’s largest lender in terms of capital. Expectations are that the FSC will approve the deal as soon as rulings come down in two pending court cases in which the legitimacy of Lone Star’s ownership of KEB is at stake. Both rulings are due in September. The change in the FSC’s attitude came after a recent intra-ministerial meeting, according to a person who attended the meeting. The person requested anonymity. The person said ministers including FSC Chairman Jun Kwang-woo and Finance Minister Kang Man-soo shared the view that “a continual delay of the review process could hurt the nation’s credibility.” Pressure from the concerned parties also seemed to have led the FSC to act. Lone Star recently conveyed a written message to the FSC that it will file a complaint against the Korean government if the review is not made. One of the pending cases involves Lone Star’s takeover of KEB in 2003, which prosecutors claim was made at an artificially low price. As for the other case, a Seoul appeals court last month cleared the former Korean chief of Lone Star of manipulating the stock price of KEB’s credit card unit in 2003. Prosecutors asked the Supreme Court to review the case. The announcement came days ahead of a self-imposed July 31 deadline to close. (Source: Joongang Ilbo.) (SITE NOTE: The HSBC has stated that the 31 Jul deadline for the sale of the KEB has been extended.) August 2008'Lone Star to Leave by Year's End (Aug 2008)' The U.S.-based equity firm Lone Star is preparing to suspend operations in the country. Financial authorities said that Hudson Advisor Korea, Lone Star's subsidiary in charge of asset management, sold most of its assets, including nonperforming loans and real estate. Moreover, Hudson Advisor Korea's number of employees dropped to five from some 150 during its heyday. Lone Star Korea, another subsidiary of the Texas-based private equity fund, also made major cuts to its staff.A major asset of the equity fund, Korea Exchange Bank (KEB), was expected to be taken over by the British banking giant HSBC Holdings sometime in September or October, pending the results of a trial on alleged stock price rigging in Lone Star's takeover of KEB in 2003. An expert projects Lone Star is likely to liquidate all its assets in the country and leave as soon as the KEB sale has been completed. (Source: KBS Global.) September 2008Deal to buy KEB falls through after HSBC takes hike (Sep 2008)' HSBC Holdings on 18 Sep scrapped an agreement with U.S. private equity fund Lone Star Funds to sell Korea Exchange Bank, bringing the deal that has been in limbo over the past three years back to square one. “Taking into account all relevant factors including current asset values in world financial markets, HSBC Asia exercised its right to terminate the acquisition agreement with immediate effect,” said HSBC’s Korea operation in a statement. John Grayken, chairman of Lone Star Funds, also confirmed that the “transaction will not be completed.”HSBC agreed a year ago with Lone Star to buy a 51.02 percent stake in Korea Exchange Bank for around $6.3 billion. The FSS, Korea’s top financial regulator, had postponed approval of the deal, citing pending legal issues. However, the government earlier this month signaled it would grant approval, without detailing a schedule. “It is regrettable that HSBC unilaterally destroyed the contract in the midst of a regulatory review despite our positive efforts,” said Financial Services Commission Chairman Jun Kwang-woo. Richard Wacker, chief executive of KEB, also expressed disappointment over the termination. “We are obviously very disappointed that we have lost a good opportunity. This is a lost opportunity for KEB and Korea,” he said in a statement. The deadline for the deal between HSBC and Lone Star had been prolonged twice before. Instead of walking out of the deal, HSBC waged negotiations with Lone Star to cut acquisition costs. At the point of initial agreement last year, HSBC was to pay 18,300 won ($16.10) per share, but it recently demanded a discount. Korea Exchange Bank shares yesterday plunged 10.3 percent, the biggest decline in four years, to 11,350 won, despite the benchmark Kospi’s upward move of 64 points, or 4.6 percent. The company was valued at $6.4 billion as of 18 Sep. HSBC’s acquisition of KEB had widely been considered a “done deal” as the foreign- and business-friendly Lee Myung-bak administration, sworn into office earlier this year, displayed a positive stance on the issue. Now that Lone Star has to take yet another journey to sell a major stake in KEB, attention rapidly gathered on the next step that the Dallas, Texas-based private equity fund may take. Top lender Kookmin Bank, which two years earlier had attempted to purchase KEB, soared 7.1 percent. Choi In-suk, a spokesman of Kookmin Bank, said yesterday, “We are still interested in taking over KEB and will closely monitor future proceedings.” However, Seo Young-soo, an analyst at Kiwoom Securities, was skeptical, citing unfavorable timing for an M&A when the country’s financial circumstances have soured lately. “Kookmin Bank will need a sizable amount of cash to take over KEB, but it has little. The liquidity crunch in the local market is making loan extensions very hard,” he said. But Hana Finance Holdings, another Korean lender that many local media pointed to as the potential suitor, said it is “not interested in the acquisition at least for the time being,” according to its spokesman Chung Jae-hoon. Hana’s shares dipped 4.7 percent on 18 Sep. Speculators have also raised the possibility that Lone Star may opt for an alternative of dividing the shares into less than 10 percent blocks and selling each block to different investors. But Ku Yong-uk, an analyst with Daewoo Securities, said that method would not guarantee the price level that HSBC initially promised. (Source: Joongang Ilbo.) November 2008Seoul court says KEB sale to Lone Star was 'unavoidable,' clears charges (Nov 2008) A district court ruled Monday the 2003 sale of Korea Exchange Bank to U.S. equity firm Lone Star Funds was an "unavoidable" decision amid the country's slumping economy, clearing involved officials of breach of trust charges. "The Korea Exchange Bank needed a large capital injection at the time," said Judge Lee Kyoo-jin of the Seoul Central District Court. "And there were no new major investors stepping out at that time except for Lone Star... Pursuing the management-rights transfer was unavoidable."Lone Star paid US$1.5 billion to take over a 51 percent stake in KEB. Korea's fifth-largest lender was then plagued by ill finances in the aftermath of the 1997-98 Asian financial crisis. Prosecutors said the price was up to 825.2 billion won (US$550 million) lower than its market value and accused a finance ministry director at that time, Byeon Yang-ho, of conspiring with then the bank's chief, Lee Kang-won, to artificially understate the lender's value. The court dismissed the breach of trust charges against Byeon and Lee, saying there was simply no other choice than to resuscitate the bank. "The bank was weaker than other banks in terms of operation size," the judge said, "Capital increase through a third party was the only choice for KEB." The verdict belatedly cleared the long-delayed case that has held the KEB deal in limbo. Amid the legal dispute, Lone Star scrapped a deal with Korea's top retail lender Kookmin Bank to sell its KEB stake in 2006. The U.S. fund reached a new deal with London-based HSBC Holdings Plc in 2007, but HSBC terminated the US$6.3 billion deal in September this year, citing falling asset values and global financial turmoil. KEB recently set up a task force to help find a new investor. Kookmin Bank has expressed interest in buying KEB in a second attempt. Prosecutors presented no opinion for sentencing. Protesting the court's decision to rule as scheduled with no additional hearings, prosecutors had abruptly left the courtroom in the final hearing on Nov. 10 and did not appear for Monday's verdict. As evidence of manipulation, prosecutors had cited KEB's capital adequacy ratio, which was 9.55 percent at the time of its sale, higher than the 8 percent ratio required under the Bank for International Settlement guidelines to survive on its own. The court found no intentional downgrading, citing Korea's global ratings' fall, the North Korean nuclear stalemate, the Iraq war and other dismal signs at that time. The court only convicted the former bank chief, Lee, of taking bribes and handed out a year-and-a-half jail term. "In the process of the KEB sale, it is undeniable that there was inappropriate activity with the defendants, but considering the whole picture, it is difficult to see that the defendants had engaged in or intended an activity amounting to breach of trust," the judge noted. Byeon pleaded not guilty. The former ministry director is already in jail, sentenced to five years for taking bribes from Hyundai Motor. On June, an appeals court also cleared stock manipulation charges for Lone Star over its KEB purchase, overturning the lower court's guilty verdict. Yoo Hoe-won, head of Lone Star's Korean unit who was jailed for five years, was set free. In a separate case, prosecutors are seeking a three-year jail term for a lobbyst, Ha Jong-sun, on charges of bribing Byeon to engineer the KEB deal. (Source: Yonhap News.) Case closed, but KEB no closer to finding a buyer (Nov 2008) Financial uncertainty, lower share price are sizable obstacles November 25, 2008 A Seoul court yesterday said Lone Star’s 2003 purchase of Korea Exchange Bank from the government was legal. The ruling ends the legal uncertainty surrounding Lone Star’s KEB ownership, which has impeded the U.S. buyout firm from reselling Korea’s sixth-largest bank over the past three years. A broken deal with HSBC can be counted among its several failed attempts. Still, Lone Star may face difficulty finding a new owner for KEB for the time being, according to local banking industry analysts. KEB’s significantly lowered value is one stumbling block, they said. The company’s stock price this year has been bombarded by the ever-expanding global financial crisis. Yesterday, shares in KEB inched down by 0.5 percent to close at 5,500 won ($3.64), down 61.8 percent from 14,400 won on Sept. 9. The price at which Lone Star had agreed to sell KEB to HSBC was 17,725 won. Lone Star has a 51.02 percent stake in KEB. “With legal uncertainties settled, we can ask whether the possibility of Lone Star selling Korea Exchange Bank has gone up,” said Hong Jin-pyo, a senior analyst at Goodmorning Shinhan Securities. “I don’t think so.” Hong said economic uncertainty also blocks the sale. “It won’t be easy for both the seller and a possible buyer to reach to a price they both are satisfied with,” Hong said. Severe capital demand at banks is also lowering the number of interested companies. Kookmin Bank, for instance, was considered to have strong interest in buying KEB, but its recent transformation into a holding company has lowered its fiscal ammunition to do so. Kookmin Bank was a preferred bidder for KEB sale in 2006, but the deal collapsed because of local financial authorities’ reluctance to approve it, due to legal uncertainty. Some market watchers say Lone Star could hold the Korean government responsible for the loss it took due to the protracted period it has taken to sell KEB. Lone Star informed the government in a letter sent in July of its willingness to seek such losses if the deal were further delayed. Market watchers say Lone Star can take the government to the international court, but the chances are low as it fears that the friction with the government will further disrupt the sale of KEB. (Source: Joongang Ilbo.) (SITE NOTE: In our opinion, the ROK should be held liable. In the Roh Moo-hyun administration, it intentionally sought to keep foreign owned businesses out of Korea spreading a xenophobic business atmosphere. Even after Lee Myeong-bak took over, the Security Exchange commission filled with Roh appointees still blocked the sale to HSBC. HSBC hung on for as long as it could wait -- even past the July deadline and finally had to give up. Should Lone Star sue? You betcha!) Court clears Hyundai executive of lobbying for Lone Star's KEB takeover (Nov 2008) A district court cleared a Hyundai Group executive on Thursday of charges that he lobbied a government official for the 2003 sale of Korea Exchange Bank (KEB) to U.S. equity firm Lone Star Funds. The not-guilty verdict for Ha Jong-sun, president of Hyundai Group Strategic Planning and Development Office, was the latest court decision that upheld Lone Star as the bank's legitimate owner after years of legal disputes. (Source: Yonhap News.) January 2009Lone Star Suspends Search for KEB Buyer (Jan 2009) Lone Star Funds has suspended its efforts to find a potential buyer to sell off its controlling stake in Korea Exchange Bank (KEB) to in the wake of the deepening credit crunch. As a consequence, the long-stalled sale of the nation's fifth largest lender looks to have been further deadlocked, which will hamper President Lee Myung-bank's efforts to attract more foreign investors to tide over the current economic turmoil. ``With the credit crunch deepening, Lone Star recently halted its move to find a potential buyer,'' a person close to the U.S. buyout fund told The Korea Times, asking not to be named. ``The fund believes that it is impossible to sell the Korean lender at a fair price right now due to a plunge in KEB share prices,'' he added. ``I think the sale is unlikely to take place for at least for one year.''Lone Star has been fishing for a potential buyer both at home and abroad after its attempt to sell off its 51.02 percent stake in KEB to HSBC ended in a failure as a result of the global financial meltdown. However, the source doesn't rule out the possibility that Lone Star will come back to the negotiation table once a potential buyer appears. ``If Kookmin Bank, for example, offers a fair takeover price, the Texas-based fund will probably resume talks,'' he said. Following the rupture of the sale of KEB to HSBC in September, Lone Star appointed Credit Suisse as a lead manager for the KEB sale and it had been looking for a new strategic, major shareholder for the lender. In October, KEB set up a shareholder transition task force reporting directly to CEO Richard Wacker. Battered by a deepening liquidity crisis, KEB stock prices have nose-dived since the failure of its sale to HSBC ? it closed at 7,050 won per share Friday, down from 11,350 won Sept. 19 when HSBC terminated the deal. ``Given that Lone Star rejected the call from HSBC to reduce the sale price to 12,000 won per share, the fund is unlikely to sell off the bank at below 10,000 won. But it won't be easy to find a potential buyer at that price at this moment,'' a market analyst said. In addition, the merger and acquisitions (M&A) market has suddenly turned into a ``buyer's market,'' as many ailing businesses are being put up for sale at low prices. Worsening financial soundness at local banks is making the sale more difficult. Kookmin, the flagship of KB Financial Group, and Hana Bank, which once showed strong interest in a takeover, are now struggling to fix their balance sheets. ``It is very difficult for KB Financial to take over KEB at this moment,'' KB Financial Group Chairman Hwang Young-key said during his New Year's address. ``There is no reason that we exclude KEB from our potential M&A target, but chances are very low right now as there is a dollar shortage here,'' he added. Lone Star, led by chairman John Grayken, is carefully considering suing the Korean government in the face of mounting complaints from investors who are angry with the delay in cashing out their KEB investment. ``Chairman Grayken has been pressed to leave the top position because of the long-stalled sale of Lone Star. No decision has yet been made but the private equity fund is mulling over taking the government to court for potential losses incurred by the delay of the sale,'' the source said. A private equity fund, generally, makes an investment over a two to three-year time frame, but five years have now passed since Lone Star acquired KEB. In the meantime, in November, a Seoul court ruled that the sale of KEB to Lone Star in 2003 was not illegal as it was unavoidable at that time to prevent the then troubled bank from going bankrupt and burdening the economy. The court ruling cleared Lone Star of all legal disputes that have stood in the way of selling off the nation's fifth largest lender. Earlier in June, the court also cleared Lone Star Korea Head Yoo Hoe-won of charges of manipulating the stock price of KEB Card. (Source: Korea Times.) January 2009Sale of KEB stymied in Q1 (May 2009) Korea Exchange Bank, the lender Lone Star Funds is seeking to sell, reported an unexpected loss as loan profitability declined. The deficit of 74.8 billion won ($59 million) for the three months ended March 31 compared with a profit of 267.4 billion won a year earlier, the Seoul-based bank said yesterday in a regulatory filing.KEB, which last posted a loss in the fourth quarter of 2003, and its local rivals are struggling to combat shrinking lending margins as the interest rates they charge on loans fall. “The outlook for bank earnings is gloomy through next year,” said Lee Young-seog, an asset manager at Korea Investment Trust Management Co. “KEB’s profit slump isn’t helping Lone Star’s efforts to sell the bank.” “We expect to post a surplus in the second quarter helped by pre-emptive risk management, net interest income improvement and cost saving,” KEB said in a statement. The bank’s net interest margin, a measure of profitability from lending, fell 64 basis points to 2.18 percent from three months earlier. Earnings at KEB were also dragged lower by loan-loss provisions, which rose to 325 billion won from 80 billion won a year earlier. Still, KEB’s shares closed 6.4 percent higher in Seoul, after Edaily reported that Korea Development Bank is interested in buying the lender. Separately, Citibank Korea said yesterday its Q1 earnings slumped 22.4 percent due to higher loan-loss reserves. Net income stood at 116.3 billion won in the January-March quarter, compared with 149.8 billion won for the same period last year, the lender said. Bloomberg, Yonhap (Source: Joongang Ilbo.) June 2009Lone Star Not Ready for KEB Sale (Jun 2009) Lone Star Funds, the Korea Exchange Bank's largest shareholder with a controlling 51-percent stake, has no intention of selling off its stake anytime soon, according to a U.S.-based source close to the buyout fund. The reaction from the U.S. private equity firm, led by Chairman John Grayken, comes as market speculation over the sale of KEB is growing after two potential buyers ? Korea Development Bank (KDB) and KB Financial Group ? recently showed interest in the lender. ``Lone Star believes that the time is not ripe for the sale and it has internally decided not to push for it until the global financial market, particularly the U.S. market, fully recovers,'' the source told The Korea Times, asking not to be named. ``The key issue is price. Lone Star wants to sell KEB at no less than 18,045 won per share, the takeover price agreed between HSBC and Lone Star to buy the Korean lender in September 2007,'' he added. ``The bottom line is around 15,000 won, KEB's share price when the two signed the M&A deal.'' KEB shares closed at 10,000 won per share Tuesday (16 Jun). ``The fund is well aware that KDB and KB are interested in acquiring KEB but they aren't considering starting negotiations as the fund believes that the lenders are not willing to pay what it wants at the moment,'' he said.According to the source, the Texas-based fund's strategy is to wait until markets fully recover and make an attempt to sell KEB at around 18,000 won per share. If they are unable to sell at that price, they will dump KEB shares and file a lawsuit against the Korean government for the losses incurred by the rupture of the deal with HSBC. ``The fund believes that the Korean government should be held accountable for the breakdown of the deal. They claim that it fell through because the government delayed approving the deal,'' the source said. ``Lone Star is seriously considering suing the government if they have to sell off KEB shares at below 18,000 won. They plan to file a lawsuit for losses stemming from the price difference as well as foreign exchange losses,'' he added. When it signed a contract with HSBC, the won was trading at around 950 won per dollar. It is now trading at over 1,250 won. Major local lenders, faced with difficulties raising profitability with domestic demand for banking services saturated, are eager to buy KEB, as its strength in overseas operations is expected to provide a big opportunity to expand globally. In a recent interview with a local news agency, KB Chairman Hwang Young-key said that the nation's largest financial holding company would seek to take over financial companies including KEB when the economy gets back on its feet. KB recently hired investment banks to raise its capital to around $2 billion by issuing new shares, a move that is seen by market watchers as a preliminary move to buy KEB. KDB CEO Min Euoo-sung also said that the state-run lender ? expected to transform into a private bank in September ? is considering buying a lender on the domestic or Asian markets to secure the deposit base. ``Given the crowded banking industry, M&A can be a good option for the KDB privatization, and KEB is one of our M&A targets. A possible takeover would come before the government starts to sell the state-run lender,'' he added. In late April, the National Assembly passed a law on KDB privatization. The government, the 100-percent owner, plans to put KDB under a holding company in September and will start to reduce its stake within five years. In 2003, Lone Star paid $1.5 billion to take over KEB, then the country's fifth-largest lender. At that time, KEB was saddled with a huge amount of bad loans in the aftermath of the Asian financial crisis in 1997-98, with its capital adequacy ratio deteriorating. In September 2007, HSBC, the U.K. banking giant, agreed to buy the controlling stake in KEB for $6.3 billion from Lone Star, but the deal ended in failure as the financial regulator delayed approval, citing legal uncertainties over the U.S. fund's takeover in 2003. (Source: Korea Times.) |
