Three proved to be an unlucky number for creditors of Samsung Life, with the sale of debt to an international bidder falling over again. For the third time in 2005, creditors have blocked the sale of the $2.43 billion stake in Samsung Life, easily South Korea's largest life insurer, in the face of Korean insurance regulations.
This time it was the bid by Kohlberg Kravis Roberts & Co. (KKR) that failed in the face of local regulations pertaining to insurance ownership. The world's largest buyout firm now joins private equity peers Newbridge Capital and Warburg Pincus as the third international bidder to unsuccessfully attempt to acquire the 17.6% stake this year.
The deal was undoubtedly attractive from KKR's standpoint. The insurer would have been its first investment in Asia and given the private equity firm a big slice of the $200 billion South Korean life insurance business, of which Samsung Life controls a third.
KKR's exit from the running will also lead many investment bankers to speculate how it affects the long expected IPO of Samsung Life. Since 1987, when Samsung Life first toyed with the idea of listing, IPO rumours have evaporated due to conflicts between both shareholders and policyholders.
The shareholders, namely the Lee family, believe that the majority of profits from an IPO should find its way into their pockets, as they take the commercial risk for the company. Policyholders, on the other hand, believe that a legacy of participatory products means that 90% of the free estate (the shareholders equity and the retained earnings) should go into their pockets, which is believe to be around W4 trillion - W5 trillion.
A successful sale to buy out firm, like KKR, would probably complicate the process further, regardless of the fact that the majority of parties concerned would profit handily from an IPO.
And problems are something the Samsung Life that can do without, given the recent harsh talk by creditors.
If threats are anything to go by, the creditors of Samsung Life, which includes a consortium of 16 - led by Korea Development Bank, Woori Bank and Korea Exchange Bank - will now be forced to take legal action against the Samsung Group if a new buyer cannot be found by the end of the month.
In total, creditors are now demanding $5.8 billion in damages from Samsung Group and group chairman Lee Jun-hee.
The Samsung Life debt held by the creditors and represented by Seoul Guarantee Insurance stems back to the financial crisis of 1998. During this dark year, affiliate Samsung Motors got into dramatic financial trouble and the Chaebol's ruling Lee family pledged shares in the life insurance arm to placate banks.
In the year following, creditors accepted 3.52 million shares in Samsung Life on the understanding that the insurer would move towards IPO in 2000. The Samsung Group then confidently sweetened the deal with the banks by covering the 19% of unpaid interest that Samsung Motor owed them.
If this unpaid interest is added to the $2.43 billion valuation put on the Samsung Life stake, the $5.8 billion pay out sum is arrived at. It is also important to keep in mind that this valuation would be easily attainable through an IPO of the company.
According to an agreement forged between Samsung Motors creditors and the group, if the sale price of KRW700,000 per share is not achieved then as many as 30 Samsung companies will shoulder the burden.
Few expected what would have been the first Asian investment by KKR to actually materialize. Korean insurance regulations stipulate that only investors that have an insurance subsidiary or own more than 15% of an insurer can buy a stake in a local life insurer.
Earlier in 2005, private equity firm Newbridge pulled out of the deal after disputes over managerial control and having a greater say over the impending listing of Samsung Life. It's understood that Warburg Pincus ran into similar problems as well.
As has emerged in previous attempts by creditors to offload the 17.6% stake, issues between policyholders and shareholders are also understood to have impeded the deal, with lobby groups from both sides arguing against KKR becoming a substantial investor.
On the other hand, short of a dramatic change of heart in setting an IPO timeline, the Lees of Samsung look set for a lawsuit.
