Seoul Near Sale of Bank Stake

28-Oct-2010

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Woori Privatization Would End Bailout From Asian Crisis; Hana Circles

By SE YOUNG LEE

South Korea is expected to start selling a $6 billion majority stake in the country’s largest financial company, Woori Finance Holdings, in a move that could form a Korean bank with the heft to compete on the global stage.

A successful sale of Woori, which was cobbled together in 2001 in the wake of the Asian financial crisis as a holding company for several troubled financial firms, would be a significant step for the government of President Lee Myung-bak, which wants to privatize more of an economy that retains significant state ownership.

Among the major lenders taken over by the state following the crisis in the late 1990s, Woori is the last to be sold off by Seoul. At that time, the government spent hundreds of billions of bailout dollars to keep the economy from collapsing.

Through the bailout process, Seoul reshaped the domestic financial landscape by guiding various mergers among lenders. As a result, the local market is dominated by four major financial-holding companies: Woori is the largest by assets, followed by KB Financial Group, Shinhan Financial Group and Hana Financial Group.

The privatization of Woori stalled because of the turbulent economic climate, as well as the firm’s size. At current prices, it has a market capitalization of 11.77 trillion won ($10.46 billion), though the government has managed to pare its holdings to the current level of 57% through various means, such as block sales to investors. It hopes to be able to finally exit from Woori as global market conditions recover.

But Woori’s large market capitalization and complicated local laws pose a formidable challenge to any purchaser. An outright acquisition of Woori is considered improbable, because local laws will require the successful bidder to acquire at least 95% of the company.

Woori’s sale, expected to begin as early as Friday, also could lead to a major change in the competitive landscape. Hana Financial Group is widely expected to submit a bid. If Hana succeeds, it would be able to leapfrog its domestic rivals and emerge as the dominant player

KB and Shinhan have both indicated that they don’t plan to make a Woori bid. Hana has acknowledged having interest in Woori, but a spokesman said it has yet to decide whether to submit a bid.

The government may prefer such an outcome, some analysts say, as it could facilitate the emergence of a South Korean lender with the scale to compete globally. Domestic lenders, facing slower growth as the market matures, have sought to find new growth engines abroad but have yet to make significant headway.

Seoul maintains, however, that it will consider all offers for the Woori stake and judge them on their individual merits.

Recent global economic turbulence has played a part in limiting aggressive international expansion by Korean banks. Some analysts believe that a clear South Korean market leader will likely be able to command cheaper funding costs for overseas acquisitions.

The stake in Woori is valued at around 6.71 trillion South Korean won based on market prices, but the government won’t be able to recover all of the money pumped into the firm unless it gets a premium. Seoul has so far recovered 5.3 trillion won of the 12.77 trillion won it injected into the company.

The government has been criticized for what is perceived as a slow and lackluster recovery of public funds. As of the end of August, it had recovered 99 trillion won of the 168.6 trillion won it has injected into the financial sector since November 1997. And it is unlikely that Seoul will get all of that money back.

“Some may see this as a failing grade,” said Public Fund Oversight Committee Chairman Min Sang-kee, head of the organization that oversees the use and recovery of the bailout funds.

“But,” he said, “if you consider how so many of the domestic financial institutions were insolvent at the time, I don’t think our recovery rate is that low.” Mr. Min said he expects the government to break even on Woori.

A Hana-Woori tie-up could involve a combination of buying some of the government stake with cash and a share-swap arrangement between the two firms for the rest. But Hana’s ability to get shareholder support is in question after Singapore state-owned firm Temasek Holdings Pte. Ltd. sold its 9.6% stake in the firm last week, triggering a steep fall in Hana’s share price.

It is possible that the government may end up with a significant minority stake in Woori, depending on how the sale goes.

“One of the criteria for judging bids has been and will be the bidder’s financing ability,” Mr. Min said. “The weight of this particular issue will be a bit heavier than the past.”

Woori on Wednesday reported a better-than-expected 508.70 billion won net profit for the third quarter, boosted by one-time gains from equity-stake sales and lower loan-loss provisions.


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