Lone Star’s sale of KEB stalls

Lone Star Funds’ planned $5.5 billion sale of Korea Exchange Bank (KEB) appears in dire straits.

First, the labor union of the bank’s employees intensified its activities to prevent the sale of the bank to Korea’s Kookmin Bank. Second, prosecutors and regulators have expanded their investigation into the 2003 sale, which resulted in at least two criminal arrest warrants. And third, Kookmin Bank has announced that it will take more time to perform due diligence, which many interpret as an intent to back out of the deal.

Dallas-based Lone Star acquired 64% of the bank from the Korean government in 2003 for about $1.4 billion and has been working to complete a sale since the holding period on its shares ended in October. However, since that time, Lone Star has been under pressure from Korean regulators, and the firm was warned that the Korean government would not allow KEB to be sold to a foreign bidder.

After Lone Star identified several domestic bidders, including Kookmin Bank, government regulators realized that the sale of the bank would be a tax-free transaction, as dictated under Korea’s tax laws. Korean legislators then tried to amend the tax laws so as to make the sale taxable, though passage of a new tax law has been slowed.

Meanwhile, Lone Star Chairman John Grayken and Vice Chairman Ellis Short went to Korea late last month in an effort to salvage the deal to sell KEB.

Their efforts included an apology to Korean authorities, an offer of $100 million as a gift to Korean charities and a posting of a $700 million deposit to offset any future tax liability should the KEB sale proceed. They also reasserted that Lone Star would abandon its fight and protest against tax levies made on a separate sale of an office tower to the Singapore government.

Grayken, who founded the fund in 1991, tried to draw a clear line between Lone Star and Steven Lee, former head of Lone Star Korea, who is under investigation for diverting billions of dollars and being involved in allegedly illegal foreign exchange transactions. The chairman said the fund conducted an internal investigation into the allegations in 2005 and found Lee embezzled millions of dollars in company money and broke South Korean law. Prosecutors are taking steps to bring in Lee, a Korean-American, who is now staying at his home in New Jersey, for interrogation.

“We are considering bringing criminal charges against him,” Grayken said, according to the Korea Times. “We fired him immediately after finding his wrongdoings. We will cooperate with authorities for the investigation of Lee and his embezzlement.”

Meanwhile, to make the sale of KEB even more implausible, the Korean Board of Audits and Investigations (BAI) has became involved in the investigations and has issued summons for 20-plus Korean officials from the Finance Ministry, including the Financial Supervisory Service (FSS). The BAI is reportedly accusing government officials of manipulating KEB’s valuation and financial accounting so as to lower its value to allow its sale to Lone Star three years ago.

In this latter row, another set of FSS officials have become embroiled in the investigations and are accused of falsifying the information they provided for its investigation. There have been several arrests in the case already. Additional criminal warrants have been issued for government officials and employees of KEB and Lone Star.