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Lone Star mulls scrapping $7.3 billion Korean bank sale

Lone Star’s cofounder and chairman is thinking about terminating a $7.3 billion deal to sell its stake in Korea Exchange Bank because of widening probes into its 2003 purchase. Local prosecutors have indicted the bank and Lone Star on stock manipulation charges.

Lone Star may choose to scrap an agreed $7.3 billion deal to sell Korea Exchange Bank to Kookmin Bank as investigations into the private equity firm’s 2003 purchase continue into its eighth month.

On 20 November, local prosecutors indicted Korea Exchange Bank and Lone Star, its largest shareholder, on stock manipulation charges. This came after a Korean court granted prosecutors warrants to arrest Ellis Short, co-founder and vice-chairman of Lone Star, and Michael Thomson, the firm’s general counsel, on charges of manipulating stock prices of the bank’s credit card unit in 2003.

John Grayken, Lone Star’s chairman, told the Financial Times: “In light of this investigation being extended again, and the issuance of arrest warrants against Ellis and Mike, we are considering what we should do with Kookmin. We are talking about terminating.”

The paper reported a final decision is expected within days.

According to a source close to Lone Star, the possibility of the deal terminating is rising on intensifying prosecutors’ probes.

The probes assume the bank’s financial health was exaggerated to enable the sale to Lone Star. Many people, including government officials, connected to the transaction have been questioned by the prosecutors who have also raided a number of offices.

Lone Star’s dilemma has earned Korea the reputation of being ‘anti-foreign toward private equity’ which some sources say is unfair.

“It is not as simple as how some foreign reporters make it seem: an anti-foreign witch hunt. The prosecutors are in a difficult spot too. They need to come up with something tangible,” said a Seoul-based source who did not wish to be quoted.

Lone Star stands to make more than $4 billion in profit if it proceeds with the bank sale.