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What does it cost to do deals in South Korea? For Lone Star Funds, a Dallas-based buyout firm, almost $3 billion.
While Lone Star still stands to double its money from the eight-year investment in Korea Exchange Bank, its experience will undermine the government’s ability to dispose of a $3.8 billion stake in Woori Finance Holdings Co. (053000), CLSA Asia-Pacific Markets said. It also furthers the perception that South Korea, where companies sell at a discount to the rest of Asia because of concern over corporate governance and North Korean aggression, is hostile to foreigners, Market Force Co.’s James Rooney said.
“Investors would look at this case as a kind of horror show, where every kind of risk that is hated by professional investors seemed to show up and create a massive distortion of intelligent markets,” said Rooney, the consulting firm’s Seoul- based chief executive officer and a member of the investment committee at Macquarie Korea Opportunities Management. “This case has made the prospects much, much worse for Woori.”
In November 2006, as regulators investigated whether Korea Exchange Bank’s financial strength was deliberately understated to let Lone Star buy the stake, a sale to Kookmin Bank (105560), South Korea’s largest bank, collapsed. London-based HSBC, Europe’s biggest bank by market value, dropped its $6.3 billion proposal after regulators held the deal in limbo for more than a year.
With politicians using Lone Star’s windfall to criticize the buyout fund’s investment strategy in South Korea and sway public opinion, foreign investors may now stay out of the bidding forWoori Finance and undermine the government’s effort to sell the nation’s largest financial company by assets, according to Shaun Cochran, head of Korea research at CLSA Asia- Pacific Markets in Seoul.
Since South Korea first announced its plan to dispose of Woori Finance in July 2010, the bank has lost about a third of its market value, or about $2 billion, as of last week.
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