If you thought you'd heard the last of the Lone Star Funds saga in South Korea, think again.
On Tuesday, the Dallas-based private-equity firm, which has been trying to offload the stake in Korea Exchange Bank it bought in 2003, said it is considering filing arbitration claims against the Korean government for damages over its unwillingness to approve a number of prospective buyers for KEB. Lone Star alleges that by thwarting these attempts to sell, the government forced it to hold the stake for longer than necessary and incurred losses along the way.
Seoul's financial regulator finally gave the go-ahead in January to Hana Financial Group Inc. to buy a 51.02% stake in KEB for $3.5 billion from Lone Star. Lone Star bought a 64.6% stake in KEB in 2003 for 2.155 trillion won ($1.9 billion). Lone Star's exit was hobbled by ongoing disagreement over the sale price and a legal probe in October that found Lone Star guilty of stock manipulation. That put pressure on Hana to cut the price it would pay to Lone Star, to placate lawmakers and labor union members who felt the firm had reaped unfairly large gains.
Another sticking point is over Seoul's decision to impose capital gains taxes on the sales of its Korean investments. Lone Star, which had been holding the investment in KEB in a Belgian vehicle, has opposed the decision by the National Tax Service because of a tax treaty between Korea and Belgium. Lone Star and the tax authorities were involved in a number of legal disputes in 2007 over the tax agency's attempts to impose back taxes on property sales by the fund.
In a statement, John Grayken, chairman of Lone Star, said, "When Lone Star made these investments, we were optimistic about Korea's ability to recover from the shock of the 1997-98 Asian financial crisis and believed we could rely on the Korean regulatory and tax laws to protect our interests in these investments. However, as the economy strengthened and Korean banks and businesses, including many foreign-owned banks like KEB, returned to profitability, public sentiment towards foreign investment in Korea soured. Korean financial and tax regulators responded with a series of illegal actions that resulted in billions of euros of damages to Lone Star's investors."
The news comes after the Korean government recently suggested it would adopt a more open stance to foreign investors as it tries for the third time to privatize Woori Finance Holdings, the country's largest financial company. Only Standard Chartered has a meaningful presence in the country, and HSBC also recently bowed out of retail banking there to concentrate on corporate banking.
Whether foreign investors want to rethink Korea's finance industry may well hinge on how this latest tussle between Lone Star and the country's regulators pan out.
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