In a deal that signals a booming start to the M&A year, Standard Chartered has signed a sales and purchase agreement to buy Korea First Bank (KFB).
The deal follows Citibank's acquisition of Koram Bank, which recently won FinanceAsia's Deal of the Year, and offers a second vote of confidence by a major multinational bank in the potential for the Korean economy.
StanChart will pay $3.3 billion to buy the bank from Newbridge Capital, the KDIC and the Korean MOFE, which together hold 100% of the bank. It is an all-cash deal and as a result StanChart will issue new equity to finance the transaction.
A 118 million share placement representing approximately 10% of the group's market cap was launched yesterday (Monday) via its M&A advisor UBS and Cazenove. The deal should raise £1.08 billion to £1.09 billion based on an indicative range of £9.15 to £9.25.
The sale of KFB had been heavily rumoured since late November, although initially many thought HSBC would buy the Korean bank. Indeed, having been close to buying Seoul Bank, then missing out on the purchase of Koram, there were many who forecast HSBC had to make a big acquisition in Korea soon, and KFB would be it. Citi's acquisition was seen as a catalytic event.
However, it is thought that HSBC dropped out of the bidding for KFB during the Christmas period. That left StanChart - which actually started the recent wave of Korean bank sales in 2003 when it bought Samsung's stake in Koram, and triggered an auction - as the preferred bidder.
KFB has been owned and run by Newbridge Capital since the Asian financial crisis, and having had its investment for over five years, its exit had long been anticipated. The sale by the Carlyle consortium of its stake in Koram - after a much shorter holding period - no doubt affected the decision.
StanChart gets a bank with a 6% market share, 404 branches, 68,000 corporate and public customers, 3.3 million retail customers, 1.1 million credit cards and around 5,100 employees.
KFB has total assets of $41.9 billion and total loans of $30 billion. It made a pre-tax profit of $747 million in the nine months to September. That equates to an annualized return on assets of around 0.41%.
Therein lies the bank's core problem - and one that StanChart will have to resolve - which is to rebuild the bank's earnings and return on assets. Koram, with a smaller asset base achieved superior earnings, while Hana has an estimated RoA for 2004 of 1.13%. Indeed, leading banks around the region have considerably better 2004 estimated RoA ratios than KFB: Hang Seng (2.08%), Bank Mandiri (2.33%), Public Bank (1.74%), Chinatrust (1.55%) and DBS (1.49%).
StanChart believes it can rapidly improve KFB's earnings profile through its consumer banking and wholesale product set. And on the positive side, KFB has the lowest NPL ratio in Korea at 1.4%.
Also on the plus and minus side, while KFB has 10% of the local mortgage market, it suffers from an unusually high cost income ratio of 60% (versus an industry average of 40%) and fee income is only 20% of revenues.
However, the UK-based bank forecasts that KFB will be earnings accretive from 2006 and that through the bank it will gain a meaningful foothold in the world's 10th biggest banking market, and one, which has a total banking revenue pool of $44 billion. Korea will become StanChart's second biggest market after Hong Kong.
Indeed, in a mark of what a major acquisition this is for StanChart, KFB represents about a third of its total assets. As of June 30, StanChart's assets stood at $129 billion, versus $41.9 billion for KFB.
The purchase price represents 1.87 times KFB's net asset value as of September 30, 2004. Analysts had predicted that KFB would be sold for anywhere between 1.8 and 2.2 times. Koram was sold at 2.0 times book.
The deal represents StanChart's second successful acquisition in the past six months having also gained a serious foothold in Indonesia via the acquisition of Bank Permata (see FinanceAsia's Dec/Jan cover story).
For Newbridge Capital, which owned 48.56% of KFB and had management control, the sale marks the end of an epoch in the Korean financial world. After the crisis, Newbridge was the first foreigner to get control of a Korean bank and its exit symbolizes the end of the crisis mentality in Korean banking. In the period of its ownership it gutted the bank of its considerable problem loans, provoked the ire of the government by enforcing its right to put loans back to the taxpayer and infuriated corporate Korea by its refusal to take part in bailouts of ailing corporates even if they were sponsored by brother Korean banks. Sources reckon that Newbridge, which was founded in 1994, is exiting with an IRR of around 25% and about $1 billion of profit.
Newbridge was self-advised in the transaction, while StanChart was advised by UBS and KDIC by Morgan Stanley.
So why did Newbridge choose to sell now? In theory, the private equity firm was under no direct pressure to sell. However, there were probably two forces at work.
One was the fact that many private equity firms in the region are looking to monetize their investments after four to five year holds. Second, and more crucially, is the game of pass the parcel that these same firms are playing out in the Korean banking sector.
Not so long ago there was Carlyle, Newbridge and Lone Star controlling Koram, KFB and KEB respectively. The exit of Carlyle suddenly created a major dilemma for the other two.
With Citigroup having bought Koram that eliminated one of very few serious buyers from their own selling equation. Newbridge and Lone Star then entered a period of game theory knowing that HSBC and StanChart were the last two obvious buyers. Whoever could move first was more likely to get an auction going. The last to sell would be left with only one potential buyer.
This fate has now been bestowed on Lone Star, which is left with HSBC as potentially the only serious bidder for KEB. This is an uneviable position to be in given HSBC's legendary reputation for hard-nosed, Scottish negotiation - especially when it knows it is the only acquirer in the field. HSBC may have made a calculated pass on KFB, knowing that KEB will also give it a solid presence in Korea, and a strong forex and international wholesale franchise inside Korea inc. It is a bigger bank than KFB and currently has a market capitalization of just over $5 billion (trading at 2.48 times book).
Then again, HSBC has now looked at three Korean banks and pulled back each time, so it is no foregone conclusion it will bid for KEB. Among the local Korean banks only Hana is thought to have the appetite to bid for KEB.
However, KEB is too big for Hana to be able to afford to buy Lone Star out in cash and whether the private equity fund would want to take Hana stock is a key question. An intriguing possibility suggested by one banker is that Temasek might buy the Lone Star block in Hana in a back-to-back trade after a Hana-KEB merger. However, Temasek, which owns just under 10% of Hana, would need special approval from the Korean MOFE to increase its stake in Hana to such levels.
Returning to StanChart, all eyes will be on how quickly the UK bank is able to integrate KFB in the coming months. One point of debate is whether it rebrands KFB with its own green and blue livery and Standard Chartered name. Many think it will leave the KFB brand intact, since it is very well regarded in Korea and StanChart's own brand is virtually unknown among the average Mr and Mrs Kim.
