PE firms struggle to secure Woori stake

But the postponement of the auction of KDIC's 57% stake in August marks the latest in a string of delays to the divestment. It has given fresh momentum to the view that, no matter how private equity firms structure their bids or how desperate the government is to sell, only a strategic buyer will pass muster.

"For private equity funds doing business with non-financial companies in Korea, I have never seen any big problems - even though you see some very big investments in areas such as property," says Scott Seo, Seoul-based banking analyst at JPMorgan. "However, financial companies are a problem."

On again, off again

KDIC came in for Woori in 2001 as part of a government-mandated consolidation of the banking sector, which was still struggling in the aftermath of the Asian financial crisis. It was a temporary solution that has now been in place for 10 years.

The most recent installment in the divestment efforts started in mid-2010, with an auction slated to take place later in the year. It was decided to sell off the company in tranches rather than to a single investor in order to maximize the value of the sale and the number of potential bidders. A total of 13 parties submitted proposals, according to sources familiar with the situation. They all wanted different pieces of the company but there was no credible bid for the principal asset - Woori Bank.

The auction was put on hold in December and revived six months later under a different format. "The key thing was the sale of control of the banking group," a source close to the auction tells AVCJ. "Last time you could big to buy a particular business or a stake as small as 4%. This time it was at least 30%."

As a result, the field narrowed to domestic private equity firms MBK Partners, Tstone Corp. and Vogo Investment. Given the size of the deal, it was expected that the funds would partner with other financial institutions in order to raise the money required. MBK is believed to have accumulated more than $4.5 billion in funding. The Korean Federation of Community Credit and Busan Bank came on board as domestic partners alongside foreign player Goldman Sachs Private Equity. Several of the LPs in MBK Partners Fund II, including the Canada Pension Plan's investment board and Morgan Stanley, agreed to participate as co-investors.

But MBK turned out to be the only bidder. Apparently the Public Fund Oversight Committee (PFOC), whose task it was to assess the proposals, considered allowing the process to move forward but eventually stuck with its initial requirement that there must be valid competition for the asset.

Tstone and Vogo gave no public explanation for dropping out in mid-August, although Min Euoo-sung, chairman of TStone, noted at the time: "As stock prices recently tumbled, funding from domestic investors fell short of our expectations."

Separately, it is suggested that their reluctance to participate was rooted in skepticism as to whether the government would really countenance selling to a private equity firm. "Our read on the situation was that unless qualified domestic strategic investors came in as anchor investors in the private equity funds, the government would be unlikely to sell," says another source familiar with the situation.

The problem with this approach is the paucity of potential bidders. Apart from a few non-bank financial holding companies, the only domestic entities deemed qualified to own a bank are the national commercial banks themselves - and none of them came forward for Woori, in partnership with private equity firms or independently.

Shinhan Financial Group, still dealing with the fallout from a corruption scandal in its banking unit, is thought to be keener on building out its life insurance business. KB Financial Group ruled itself out of the bidding in December, saying the price was too high and that it wanted to focus on non-banking operations - such as life insurance and investment banking - in order to boost earnings. Hana Financial Group is in the process of acquiring Korea Exchange Bank (KEB) from Lone Star Funds.

The other contenders are state-run and therefore ineligible, as Korea Development Bank found when the Financial Services Commission vetoed its pursuit of Woori in June.

Where next?

No one is sure what will happen next. The PFOC was due to disband at the end of August and reform with new members, but the divestment process is inextricably tied to wider political issues. Elections for Korea's National Assembly and presidency are scheduled to take place in April and December of next year. Privatization of the banking sector - especially where private equity firms are potential buyers - is a hot-button issue; some politicians tread carefully around it while others might be accused of grandstanding.

"Right now the political issues are overwhelming the economic issues," says JPMorgan's Seo. "The level of democracy is better here than in other emerging markets and the government can't do anything without open communication."

AVCJ's sources are divided on the impact the elections might have on the Woori auction. On the one hand, it is argued that the process could be mothballed until a new president is in place. On the other, President Myung-bak Lee is entering his final year in office and privatization was among his administration's top priorities as part of broader plans to boost competition in the financial services sector. Having seen much of his agenda thwarted by political opposition, Lee may seek to act on Woori before time runs out.

Lee's options appear to be: encourage a strategic buyer to come forward from among the domestic banks; sell the holding in increments in the open market; or restart the auction with a strong statement that private equity ownership is welcomed. The latter would involve a philosophical about-turn. "Banks are the center of a lot of government policy, they are seen to have a public sector role and so people aren't comfortable with private equity," one Korean GP observes, explaining his decision not to go anywhere near the recent auction.

This discomfort has been colored by experience. The Carlyle Group and Newbridge Capital joined Lone Star in buying up distressed Korean banks after the Asian financial crisis. They profited handsomely but - deserved or not - came to be seen by the public as financial opportunists who took advantage of Korea during a period of difficulty. Lone Star's messy and protracted exit from KEB has done little to inspire confidence in PE involvement in the banking sector.

In this context, selling a significant asset like Woori to a private equity firm might be seen as an unnecessarily controversial gamble. "When was the last time one of the largest banking groups in an OECD country was sold in a non-distressed, normalized situation to a financial sponsor?" asks the source close to the auction. "The answer is never."

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Save this article  
• Send to  

• Topics
• North Asia
• Financials
• Restructuring
• Investments
• MBK Partners
• Vogo Investment
• The Carlyle Group
• Newbridge Capital
• Lone Star Funds