Not since Luke & Laura has there been such an epic drama. Korean Private Equity history has seen Lone Star, and their stake in Korea Exchange Bank (KEB), go through a lot of drama. Over the years Lone Star has tried to sell their 51% share in KEB but have faced obstacle after obstacle.
Well, seems like they are really serious about it now. In both private equity channels and standard news media the news is that Lone Star is making serious inquires into selling their stake. What got my attention on the seriousness of their intentions is that Lone Star actually got sell-side representation. Meaning Lone Star is spending money to get a deal done.
Always a good sign. However, as anyone in M&A would know, now is not necessarily the best time to sell. It’s a depressed market (and the deal has a lot of baggage):
“Lone Star may have to sell it cheap, if they want to exit from KEB, as I don’t expect a lot of foreign investors would bid because KEB is already quite expensive,” said Park Jung-hyun, a Hanwha Securities analyst.
“The acquisition premium will be less than 20 percent to the current price … and, among domestic potential bidders, Kookmin has better M&A firepower than Hana,” said Park, adding Hana would really have to convince its shareholders as it may need to raise capital for a KEB deal.
Emphasis mine.
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Well, seems like they are serious about it now.
They were always serious about selling. Finding interested buyers hasn’t been the problem – it successfully enticed both Kookmin and HSBC. But both deals fell apart, either due to the pressure from alleged improprieties (Kookmin), or else due to government’s refusal to sign off on the deal in time (HSBC).
Lone Star bought their stake in 2003 for $1.2B.
They tried to sell it to Kookmin Bank for $7.3B in 2006. HSBC in 2008 for $6.3B.
It’s worth $3.9B today plus a 20% premium (typical for a public transaction) that would be $4.7B. So, subtract $4.7 from the highest offer of $7.3 would be a difference of $2.6B. So the bad news is that they have to sell it for perhaps a 36% discount. The good news is that even if they sell it for $4.7B, that’s still an IRR of 34% (provided that the $1.2B they put in in 2003 was all equity and no debt and that they don’t have to pay off any debt). I don’t have all the data, but if the seven year IRR is 34% and the industry considers 30% good, then I ain’t crying for Lone Star.
Those are definitely nice numbers (even if they were better a few years earlier). But I’m just saying that they had offers before, and would have sold KEB earlier if they hadn’t been prevented from doing so.
god bless luke and laura.
gbnhj,
That’s a good point, which would clearly make their IRR numbers much higher. Let’s say, for the sake of argument, that Lone Star did sell in 2006 to Kookmin for $7.3B. That would be a net (excluding transaction costs BUT not counting cash flow inclusion) proceed of $6.1B or a three year IRR of 82.6%! A total of 508% return in just three years…
Those type of numbers, uh… got the Korean government’s attention, to say the least. Hey, I’m not saying what the Korean government did was right. It wasn’t right. I’m just saying I can see how the government’s attention was piqued.
The ultimate beneficiary, at the end of the day, may be Kookmin since they are the early favorite to be the buyer. They are getting a 36%-ish discount.
If Wangkon’s numbers are accurate at all, then we can safely say that the Korean Gov’t effectively robbed an American firm of 3 billion dollars or so. That is 1/10 of our trade deficit. It’s a huge amount of money, and I can only hope Korea, Inc will pay dearly for it in terms of decreases FDI etc.
Oop… I believe it’s one fourth of our trade deficit with Korea.
Largely true.
I would agree that is already has suffered in terms of PE FDI. There are other forms of FDI. However, despite all this, the fact that Lone Star will still make a decent return despite everything that has transpire means that PEs will eventually return to Korea. It could have been worse. U.S. and European PEs have invested in foreign nations before and have seen their businesses nationalized and they have lost all their money.
Btw… I was wrong with the IRR for the proposed current transaction. IRR is not 34% year-over-year for seven years. It’s really about 21%. That would be average or so-so returns. In the PE world 20% is “okay.” 30% is very good. What Lone Star could have pulled off in 2006 is what can be discussed as “legendary” returns. The stuff that Lone Star would have bragged about in all the PE gatherings such as ACG. PE guys like to feel like they are IRR gods and will gong their cymbals and blow their horns in their champagne and lobster get togethers when they generate 70%+ returns.
Of the proceeds, 70% benefits about a dozen guys holding convertable common/preferred shares. 23% benefits preferred shareholders (i.e. the pension funds and school endowments that ponied up all the cash) and about 7% pays fat fees to bankers, investment bankers, accountants, lawyers… so on and so fourth. The total number of benefactors will probably be no more than a couple hundred with the weighted average heavily favoring those 12 or so holders of perferred convertibles. Or at least that’s how things typically play out in that industry. I don’t know for sure. I haven’t examined all the info.
Ha… this just gets better:
http://english.chosun.com/site/data/html_dir/2010/03/16/2010031600872.html
Korean government to tax Lone Star capital gains. Now, I’m not a tax expert here. It would seem to me that Lone Star is avoiding Korean taxation so it can bring the proceeds into the U.S. perhaps? How do the tax laws work here for foreign investments or in Korea for foreign investors? I mean…. capital gains must be taxed at least once. It is unfair if Lone Star is facing double taxation. If Lone Star doesn’t want to pay any taxes whatsoever, then that’s not fair.
The article also says someone at the National Tax Service thinks it will sell for 5.7 trillion won. That would be almost $5.02B USD assuming exchange rate of 1,135 won to a dollar. That’s kinda close to my estimate of $4.7B… hummm…. we’ll see. You never know in these auction environments.
Does anyone else get the feeling that the NTS is just making this crap up as it goes along. I mean, it’s like the writers of “Lost” have taken control of the asylum.
DLB
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