In Finance Asia.com, Steven Irvine writes about why HSBC has announced its acquisition of Lone Star’s controlling stake in KEB even before Korean authorities have OK’d the deal.
The Korean Financial Supervisory Commission, meanwhile, said it would not approve the deal prior to a court decision on Lone Star’s initial 2003 acquisition of KEB.
Two Korean papers, meanwhile, characterized the announcement as “coercing the Korean government,” while Money Today (Korean) asked if HSBC and Lone Star were “testing” the government or simply ignoring it.
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It would be so interesting if we could follow the money — and not just the politics — on this one. But Lone Star’s accounts are not public, and so, we just guess. I guess that:
Lone Star used at least 90% leverage to buy its stake in KEB, spending $1.4 billion in Oct 2003, now 4 years ago. I guess that it had to offer, say, 15% interest to raise that leverage.
That’s over $200m in interest that Lone Star has had to pay out each year. After 4 years we’re nearing a billion, which is nearing half the profit on an investment that has tripled since acquisition. Profit that only exists, mind you, if the asset can actually be sold.
They probably had to borrow short-term money to even make those interst payments, so running their losses up even further. And then, boom! Subprime time. And no one will lend high-risk money anymore. LS really needs to unload this baby. The people who paid for it want their money back.
Don’t forget there has been some profit-taking in the interim. In February, Lone Star voted its shares in favor of a dividend to shareholders of KEB, yielding US$445 million.
In June, Lone Star sold 13.6 percent of KEB on the open market, yielding US$1.28 billion — total US$1,725,000,000 so far, with the controlling 50.1% block to HSBC expected to yield another US$6.3 billion (in June Reuters was valuing that same stake at US$4.75 billion so there’s already been a nice bump).
Lone Star will have invested US$1.4 billion (you’re probably right it’s mostly borrowed), paid carrying costs of US$800 million in interest, plus its US$100 million “donation to society” and tens of millions in legal fees, and still made a very handsome profit through its four-year investment in KEB. Now HSBC is going to pony up US$6.3 billion for the controlling stake in KEB. Let’s say US$1 billion in debt remains — that will give Lone Star a US$5.3 billion profit.
Not bad for US$800 million spent carrying the note.
It’s too bad Lone Star can’t simply be admired for making good on an investment that NOBODY ELSE at the time was willing to make.
It wasn’t just that Lone Star made an investment nobody else wanted; they were literally begged by the Seoul government to do it. No good deed goes unpunished.
Yes, I’m quite sure that Lone Star is going to make out all right. But like I said, the profit is only real if the asset is actually sold. The risk managers have assigned a probability to that, presumably the highest one.
But they’ve also assigned probabilities to (a) Lone Star has to keep paying interest for another 3 years before it can sell; (b) Lone Star goes under and its assets get swallowed up in years of legal wrangling; (c) the sale process drags on into the next global recession, driving down the price, etc.
According to the Korean press, this is about Lone Star trying to get out of paying taxes on the profit, not the Korean government trying to block the sale. Seems ridiculous. How can they evade taxes if they haven’t sold the company yet?
I’m one to look to the future that wishes HSBC and 외환 the best luck going forward, it truly appears to be a marriage well made, given their respective operations. Only a cynic would say HSBC is in it for the Kurdish retail savings market.
As for Lone Star…
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FUCK OFF !
dlatn, you really are a lousy troll.
Go away to learn your craft. Then get back to us.
What has Lone Star done wrong, besides make a good investment in a country that does not seem to like foreign companies to make good investments?
In a KBS news report, HERE, Kim Gi-jun, the head a Korean banking and economic research center, said the following:
How is reaching a sales agreement ignoring Korean authorities and courts? Does Mr. Kim think Lone Star should sit around with a thumb up her butt while waiting for Korean authorities to figure out how they can screw her?
The news report also suggests that if Korean authorites cannot find dirt on Lone Star, then they will go after HSBC.
What’s funny is that in its attempt to try to screw Lone Star delaying the sale of her shares in Korea Exchange Bank (KEB), the Korea government has not only screwed up the chances for a Korean-owned bank (KB) to acquiring KEB, she has unintentionally helped Lone Star get a better price for her shares in KEB since expected changes in the financial market make KEB shares more valuable today than they were last year. In fact, even though HSBC is paying a premium for Lone Star shares, the Hong Kong bank may think she is getting a bargain.