HSBC kills KEB deal with Lone Star

Lone Star's search for an exit from KEB resumes, following a year of regulatory hurdles and court cases that held up the HSBC deal. This is the second time Lone Star has had a deal for its KEB stake fall apart.

HSBC Bank has walked away from its August 2007 deal to acquire US private equity firm Lone Star’s 51.02 percent stake in Korea Exchange Bank (KEB).

HSBC said in a statement it terminated the agreement due to factors such as current asset values in world financial markets, as well as the two parties' inability to agree on terms.

Lone Star decided to sell its stake to HSBC last year for $6.3 billion (€4.3 billion), but the deal consistently bumped into regulatory hurdles as a result of allegations dogging the firm’s 2003 acquisition of its stake in the Seoul-based bank.

Korea’s Financial Services Commission would not approve the deal until it was cleared of the allegations it faced. In June this year, while the Seoul High Court cleared Lone Star on an allegation of stock price manipulation of KEB’s former credit card unit, prosecutors were dissatisfied with the ruling and lodged an appeal with the country’s Supreme Court.

Another court ruling pertaining to Lone Star’s acquisition of KEB is also pending.

The deadline for the completion of the deal was set as 31 July, and HSBC and Lone Star agreed that the deal could be “terminated at any time by any party” until the deal was approved by the regulator.

Sandy Flockhart, chief executive officer at HSBC Asia and an executive director of HSBC, stressed in a statment that the bank remains committed to Korea, and “it is our aim to play a full part in the country’s financial services sector”. The bank will focus on its existing operations in Korea, he said.

The termination of the agreement ends a frustrating wait for HSBC, while Lone Star is back to square one once again. Both sides have spent the past year in trying to convince regulators to approve the deal, and in trying to assuage the concerns of relevant stakeholders including the labour union of KEB.

In July this year, HSBC and the labour union of KEB entered into an agreement according to which the UK bank pledged to keep KEB listed on the Korean Exchange if the deal went through. It also pledged not to change the name of the bank and to maintain the current levels of employment, saying that there are no plans for job cuts.

Lone Star, on the other hand, was under increasing pressure from its investors to complete the sale, according to Korean media reports. The firm at various times over the last few months, considered a block sale of shares and recently even contemplated suing the Korean government if the deal wasn’t approved, according to The Korea Times.

In January last year, Lone Star was forced to terminate a $7.3 billion agreement to sell its stake to Kookmin Bank as a result of continuing investigations into its 2003 investment in KEB.

Lone Star acquired its 51 percent stake in KEB for $1.2 billion.