Lone Star Will Sell Keb To Hana

Lone Star Funds has agreed to sell its 51% stake in Korea Exchange Bank to Hana Financial Group Inc., according to a person close to the transaction, a surprise deal that thwarts a rival attempt by Australia & New Zealand Banking Group Ltd. to purchase the stake.

Lone Star's stake is worth about $3.8 billion based on KEB's latest share price. While the exact terms of the deal weren't yet known, Hana would likely pay a premium of 10% or more to the current market value, the person said. Lone Star and Hana have signed a memorandum of understanding, and a sales and purchase agreement is expected to follow within several weeks, the person added.

The deal will require regulatory approval.

ANZ has been conducting due diligence on KEB with the intent of purchasing Lone Star's stake, which would have vastly boosted the Melbourne-based lender's efforts to expand in East Asia.

A Hana-KEB tie-up could create a strong domestic Korean player that marries Hana's strength as a retail commercial bank with KEB's dominance in trade finance and foreign exchange. But it also means Hana will likely steer clear of the bidding for the South Korean's government's 57% stake in Woori Finance Holdings Co. when that process moves forward. Hana and KB Financial Group Inc. have been considered the most probable suitors for Woori.

Dallas-based Lone Star's long-running attempts to sell the stake in KEB it acquired for $1.3 billion in 2003 have been dogged by scandal and court cases as well as bad timing. After the 1997-98 Asian financial crisis, Lone Star and other foreign investors bought assets cheaply and sold some of them profitably as the country's economy recovered. But the size of those profits, and the fact that foreign private-equity funds weren't subject to South Korean taxes, later stoked local resentment.

In 2006, Lone Star reached a deal to sell its KEB stake to South Korea's Kookmin Bank for more than $7 billion, but a probe into the circumstances under which Lone Star bought KEB ended up derailing the transaction. A person involved in the sale process said the acquisition had become too politically sensitive for Kookmin to consider.

Lone Star's standing was also hurt when regulators discovered that its country head during the KEB purchase, Steven Lee, embezzled millions of dollars from his firm, causing Lone Star to file inaccurate tax returns. Upon looking into the matter, Lone Star discovered that Mr. Lee had submitted dozens of phony invoices during his seven years in Korea, diverting about $12 million to pay for property, works of art and cash gifts to family members. The firm has said it resolved tax discrepancies associated with Mr. Lee's actions.

In September 2007, Lone Star reached a deal to sell the stake to HSBC Holdings PLC for $6.3 billion, but regulatory approval was held up by ongoing court cases. After the collapse of Lehman Brothers in September 2008, HSBC dropped its offer, citing the turmoil in global financial markets.

Among the legal cases that had help up approval of the HSBC deal was one in which a former government official and two former KEB employees were accused of making KEB's financial condition look worse than it actually was to facilitate Lone Star's 2003 purchase. In another case, Lone Star and one of its executives were found guilty of manipulating the stock price of a KEB affiliate, but the verdict was overturned on appeal.