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— Capital Calls —
Lone Star was understandably pleased. The decision overturned an earlier guilty verdict against the firm and spared its top Korean representative, Paul Yoo, a five-year prison sentence. But Lone Star's win was a sliver of solace. "Nothing's changed," says a source. The firm's long-stalled $6.3 billion deal to sell KEB, Korea's sixth-largest bank, to HSBC Holdings plc remains hopelessly bogged down in a political quagmire.
HSBC and Lone Star have until July 31, their self-imposed deadline extended from April, to complete the deal. With any luck, the new government of President Lee Myung-back could prevail upon the Financial Supervisory Commission to approve the sale. But the FSC seems to be withholding a clearance while certain legal cases are pending. Buyout firms know the pitfalls of operating in emerging markets. But Lone Star was clearly unprepared for the firestorm in Korea. Its predicament recalls Enron Corp.'s eight-year battle in the '90s with the Indian government over a power plant, when the company became a symbol of rapacious foreign investors. The nationalist backlash dates to Asia's financial crisis a decade ago, when U.S. investors pumped money into troubled banks. Ripplewood Holdings LLC and JC Flowers & Co. LLC, which bailed out Japan's Shinsei Bank Ltd., formerly Long-Term Credit Bank of Japan, in 2000, doubled their investment, but theirs was not the only success story. In South Korea, buyout forays were amply rewarded, stoking antagonism against so-called speculative foreign investors, known as mok-tui, or "eat and go" investors. That many Koreans regard foreign buyouts of financially troubled companies as an outflow of national wealth is an "undeniable fact," says Sang-Jo Kim, an economics professor at Hansung University in Seoul. Lone Star, which acquired KEB in late 2003 for $1.3 billion, was late to the game, making its potential exit, with its nearly $5 billion profit, difficult. Public hostility heated up during that period, particularly after Dubai shareholder activist Sovereign Asset Management Ltd. attempted -- unsuccessfully -- to remove the chairman of local refiner SK Corp. For three years, Lone Star was the target of probes by government bodies, namely, the Financial Supervisory Commission, the National Tax Service, the Board of Audit and Inspection, the National Assembly and the Supreme Public Prosecutor's Office. The suspicion: that Lone Star bribed officials to buy KEB cheaply. No evidence of wrongdoing has surfaced. Lone Star persistently pointed out that it paid a 16% premium to the then-market value of KEB after no white knight emerged to rescue the bank. Still ongoing is the trial of officials involved in the sale for breach of fiduciary duty for selling the bank too cheaply. At the time of the buyout, its affiliated credit card company also faced collapse, with $1 billion in potential losses. Lone Star's defense has been that the firm intended to let it fail, but the FSC stepped in and threatened to undermine Lone Star's ability to manage KEB if it didn't come to the rescue. In February, a district court issued a guilty verdict against Lone Star and Yoo for stock manipulation, but a Seoul high court cleared the firm and Yoo of any charges June 24. Prosecutors are mounting an appeal. As a matter of Korean law, FSC needn't hold up approval of KEB's merger because of pending judicial processes, but it is in a bind, made worse by an uproar over the government's decision to let U.S. beef back into local markets. Meanwhile, damage to South Korea's standing as an aspiring Asian financial hub is incalculable. Foreign investment in South Korea has fallen for the third consecutive year. A frustrated HSBC cools its heels. As for Lone Star, the firm hasn't wasted any opportunity to recoup up to 75% of its $2 billion outlay through dividends and a block sale. Unlike HSBC, it doesn't need FSC's permission to sell block shares, though that won't generate anything like what it had once expected. |
Private equity has been on trial in South Korea for some time now in a case where everyone ultimately loses. Lone Star Funds 
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