Hana talking to Lone Star about smaller KEB

SEOUL (Reuters) - South Korea's No.4 lender Hana Financial Group (086790.KS) is in talks with Lone Star to buy a smaller, 10 percent stake in Korea Exchange Bank (KEB) as an option to keep their $4.3 billion deal alive, a source said on Friday.

Hana agreed to buy Lone Star's 51 percent stake in No.5 ranked KEB (004940.KS) late last year, but the deal has been held up by regulatory and legal delays. A deadline to complete the deal passed earlier this week, putting what could be South Korea's biggest banking transaction in doubt, but both parties agreed to continue talks.

If Hana and its units buy a stake in KEB of 10 percent or less, it would not require regulatory approval, giving them some time to save the deal for a controlling 51 percent of KEB owned by the U.S. private equity house.

But price gap remains a major difference, the source who is familiar with the matter said. KEB share prices have tumbled by nearly 40 percent from the agreed 14,250 won a share they announced in November.

"(Both parties) are looking into the (10 percent) stake takeover matter very positively... and there's uncertainty on prices as they keep negotiating on it," said the source, who declined to be identified due to sensitivity of the issue.

Paying a hefty premium to the current share price of KEB may further irk Hana investors, who have already punished Hana shares by sending its shares down 10 percent since regulatory delays on May 12.

Lone Star has also been demanding a higher price for the KEB stake to reflect gains from the bank's recent sale of a stake in Hyundai Engineering & Construction (000720.KS), another source close to the deal said earlier.

A Hana official said it was unlikely to announce the results of negotiations with the U.S. fund this weekend as they needed to be deliberated by its board members. He declined comment on the prospects of a deal for a smaller stake.

Shares in Hana dropped 1.4 percent and KEB rose 1.6 percent.

(Reporting by Ju-min Park and Lee Chang-ho; Editing by Jonathan Hopfner and Lincoln Feast)