Lone Star to pursue arbitration over KEB exit

Lone Star purchased a 51% stake in KEB for $1.2 billion in 2003 but subsequently ran into regulatory problems. Last year the private equity firm was found guilty of manipulating KEB's stock price around the time of its purchase, and was ordered to pay KRW3.92 billion ($21 million) in damages and sell down its stake to less than 10%. Paul Yoo, Lone Star's former South Korea head, was also sentenced to three years in prison. He appealed against the ruling.

"When Lone Star made these investments, we were optimistic about Korea's ability to recover from the shock of the 1997-1998 Asian financial crisis and believed we could rely on the Korean regulatory and tax laws to protect our interests in these investments," said John Grayken, the private equity firm's CEO. "However, as the economy strengthened and Korean banks and businesses, including many foreign-owned banks like KEB, returned to profitability, public sentiment towards foreign investment in Korea soured. Korean financial and tax regulators responded with a series of illegal actions that resulted in billions of euros of damages to Lone Star's investors."

Grayken added that he hoped the South Korean government would "engage in good faith discussions to resolve these claims," with arbitration a last resort. If a claim is filed, it would be heard in Washington D.C.

The agreement between South Korea and Belgium-Luxembourg protects investors against unlawful government interference with their property rights. It is relevant to Lone Star's investment in KEB because some of the LPs reside in Belgium. In the claim, Lone Star cites Korean regulators' unwillingness to approve a string of prospective buyers of the KEB stake, thereby forcing it hold the asset for longer than necessary, and the arbitrary, unlawful and confiscatory taxation of exit proceeds from its investments.

Lone Star first attempted to exit KEB in 2006 through a sale to domestic player Kookmin Bank for $7 billion. Regulators rejected that transaction, leading Lone Star to relaunch the auction process in early 2010. Prospective investors including MBK Partners and the Australia and New Zealand Banking Group (ANZ) entered talks about acquiring the asset, but issues relating to regulations and financing meant that Hana was the only viable option.

Hana officially agreed to acquire the shareholding in late 2011 for KRW3.92 trillion, or KRW1,4900 per share - a 46% premium to KEB's last close. The financial services player initially offered $4.2 billion in November 2010, but regulators withheld their approval until Lone Star's court case was resolved.

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• Topics
• North Asia
• Exits
• Financials
• South Korea
• Financial Services
• Exit
• regulation