HSBC to buy 51 pct of Korea's KEB for $6.3 billion

By Clara Ferreira-Marques and Kim Yeon-hee

LONDON/SEOUL (Reuters) - HSBC agreed to buy 51 percent of Korea Exchange Bank from private equity firm Lone Star for $6.3 billion, in a deal that could propel the UK-based bank into the top ranks of Asia's third-largest banking market.

If it overcomes complex legal hurdles and secures government and regulatory approval, Monday's deal will mark Lone Star's LS.UL exit from a controversial purchase and allow it to more than quadruple its initial investment in KEB (004940.KS).

For HSBC Holdings Plc (HSBA.L) (0005.HK), which has tried repeatedly to buy a bigger presence in South Korea, the deal will boost its clout after peers Standard Chartered Plc (STAN.L) and Citigroup (C.N) became key players by buying local rivals.

But the protracted legal tussle over the 2003 acquisition of KEB -- which led Lone Star to scrap a $7.3 billion deal with local bank Kookmin 060000.KS last year and prompted another buyer to end talks -- could again throw a spanner in the works.

"The offered price is very high. But the real key is whether the government will approve it," said Hana Daetoo Securities analyst Han Jeong-tae.

"For domestic banks such as Kookmin, the deal is a strategic miss and they have to hurry up and change their strategies."

HSBC, which first confirmed talks with Lone Star two weeks ago, said the purchase was conditional on receiving necessary approvals by April 30, 2008. The price will increase by $133 million if the deal is completed after January 31, 2008.

Finance Director Douglas Flint was optimistic HSBC would be able to secure the deal within the eight-month framework.

"We believe we have the credentials to put ourselves in a very favorable light," he told Reuters.

TOO KEEN FOR KOREA?

The deal -- at a time when turbulence in capital markets is putting acquisition activity on ice across the financial sector -- would be the second-largest in South Korea's financial sector, after Shinhan Financial Group's (055550.KS) $7.2 billion acquisition of LG Card 032710.KS in 2006.

HSBC has bounced back from its first-ever profit warning this year to become one of the most resilient banks amid recent jitters and the bank said on Monday it "will and can" pay for the $6.3 billion deal from its own resources.

Europe's largest bank brushed off concerns that, after missing out on big Korean deals in the past, it was overpaying for KEB. The KEB stake has a market value of $5.1 billion -- at least $1.2 billion below Monday's offer.

"We are very comfortable with the price and we think it is fair to all parties," HSBC's Flint said. "The price that we are paying is comparable to other transactions (in Korea)."

HSBC's offer price corresponds to 18,045 won or $19.2 per share, according to HSBC's conversion rate -- a premium of over 23 percent against Monday's closing price of 14,600 won.