The Korean government's decision to sell Seoul Bank to Hana Bank rather than the foreign investment fund, Lone Star signals a change of direction.
On two previous occasions banks had been sold to foreign investment firms, the lucky buyers being Newbridge Capital and Carlyle; meanwhile the government watched Korea's economy boom; and saw that the domestic bank merger between Kookmin and H&CB had proven a phenomenal success.
So few ought to be surprised that when faced this time round with a bid from a foreigner and from a domestic entity it opted for the latter; and to gain the chance to create another large, Korean financial champion.
In strictly financial terms it may have been better off selecting Lone Star, which was offering cash rather than stock; and which, unlike Hana, would not benefit from W400 billion of tax rebates.
Indeed, in the worst case scenario its deal with Hana will earn the government only W700 billion. After having injected W5.6 trillion ($4.7 billion) into Seoul Bank that equates to a return of only 12.5 cents in the dollar from its earlier bailout.
However, that 12.5 cents represents only a guaranteed floor. The government has the potential to make much more depending on how well the new entity performs in the stock market.
The newly merged entity will be listed (meanwhile Hana will be delisted); and the government will hold 30% of it. Government sources say it wishes to divest this stake as soon as possible, and that it will not put any government figures on the board.
However, it will be interesting to see just how soon the government chooses to sell; for if it gets its timing wrong, criticisms will surely follow from Korea's notoriously price-sensitive taxpayers.
Hana's chairman, Kim Seung-yu has stated that he feels the fair value of the financial group is W30,000. This would make the government's stake worth W1.8 trillion, and equates to a return of 32 cents in the dollar.
Should the government wait till the stock hits that price?
Hana Bank is currently trading at W18,050 and its 52 week high was W21,700. UBS Warburg, meanwhile has a price target on the stock of W23,000. On a price to earnings basis it trades at a discount to both Kookmin and Shinhan, which suggests it has upside when it becomes the country's third biggest bank (jumping from fifth).
Hana has a strategic partner in Allianz and is relatively new to the Korean banking scene; as such it was liked by foreign investors for its new and vigorous culture, and had one of the cleanest loan books. It thus emerged from the financial crisis looking stronger than much of its peer group.
However, its relative youth also meant it was a great deal smaller than its peers with only W57 trillion in assets. Chairman Kim, while promising this year to make a return on equity of 25%, also said the bank had to make an acquisition and reach an asset size of W100 trillion in order to 'meet the huge IT expenditures we will have to make" (see FinanceAsia magazine, May 15, page 33).
With the Seoul Bank deal he will have gone somewhere towards that target, and will have created a bank with W83 trillion of assets versus Kookmin Bank's W194 trillion.
Hana's corporate franchise will be nicely complemented by Seoul Bank's now-profitable retail banking operation. Even before the merger, Hana had been growing its retail banking operation - and gained 45% of its revenues from this area.
The synergies will help to create Korea's third biggest financial powerhouse. However, as with every Korean merger, dealing with management issues and partisan cultures may impede progress in the short term. Seoul Bank's union has also made the customary threats that it won't tolerate redundancies.
Hana still has the goal of obtaining 40% of its earnings from fee income and as such its M&A for the year could be far from over. Indeed, it is still interested in buying a broker, just as Shinhan did when it bought Good Morning Securities earlier this year.
For the government, a sale to Hana probably made the most political and macroeconomic sense; but whether it makes the most fiscal sense - only time will tell.
