HSBC walks away from $6.3 billion S.Korea bank buy

SEOUL (Reuters) - HSBC (HSBA.L) dropped a $6.3 billion offer for 51 percent of Korea Exchange Bank (004940.KS), blaming turmoil in financial markets and ending what would have been the biggest cross-border move in South Korea's bank sector.

Abandoning the long-running deal, which had been beset by regulatory delays, added to speculation HSBC would look to buy a distressed western peer amid a financial sector shakeout that has seen share prices plunge and forced a hasty round of dealmaking.

"In the light of developments around the world, not least changes in asset values in world markets, we do not believe it would be in the best interests of shareholders to continue to pursue this acquisition on the terms negotiated last year," HSBC Asia CEO Sandy Flockhart said in a statement.

Shares in KEB, South Korea's sixth-ranked bank, tumbled 10.3 percent to 11,350 won on Friday, bucking a 4.6 percent broader market rally.

HSBC's London-listed shares jumped 15 percent to 913 pence by 1240 GMT, joining in a dramatic jump by most banks around the world after regulators in Britain and elsewhere banned short-selling of bank stocks and the United States said it is looking at a radical solution to the financial crisis.

John Grayken, chairman of U.S. private equity firm Lone Star LS.UL, which was selling the KEB stake, said he was disappointed with HSBC's decision to walk away from the deal.

HSBC, Europe's biggest bank and faring better than most rivals during the financial crisis, has been rumored as a potential suitor for U.S. savings and loan Washington Mutual (WM.N) and other troubled banks.

Its executives have played down the prospect of a big deal for an investment bank or U.S. commercial banks, however, and it isn't interested in Morgan Stanley (MS.N), a person familiar with the matter said on Thursday when talk swirled it could be looking. Any deals are likely to be targeted at emerging markets, executives have said.

"We do not rule out the possibility of the bank looking to acquire assets in strategically attractive markets and business areas," said Manus Costello, analyst at Merrill Lynch in London.

Analysts said the slump in valuations, strains on other banks and HSBC's strong capital base and liquidity made it a possible acquirer of assets.

KEB's share price has held up better than its peers because of the merger premium. KEB had shed 13 percent in the past year to Thursday's close, outperforming the MSCI index for Asia-Pacific excluding Japan .MIAPJ0000PUS, which tumbled by nearly a third.

Separately, HSBC said on Thursday its HSBC Overseas Holdings UK Ltd unit agreed to sell its 18.6 percent stake in Mexican micro credit lender Financiera Independencia (FINDEP.MX) for $145 million.

With the British bank's withdrawal, Lone Star, which has been struggling to exit its $1.2 billion investment in the South Korean bank since 2006, is likely to offload its KEB shares in a block trade at a discount, analysts said.

Rival Kookmin Bank 060000.KS, whose 2006 deal to buy a bigger stake of KEB for $7.3 billion was scrapped by Lone Star LS.UL, said it was watching the situation with interest, though it is spending about $4 billion as part of the process of setting up a holding company. Kookmin shares were up 5.7 percent.

"We think the likelihood of Lone Star selling its sake in the market is higher than before due to global liquidity constraints," Morgan Stanley said in a note.

LONG DELAY

HSBC agreed a year ago to buy Lone Star's majority stake in KEB, hoping to propel itself into the top ranks of Asia's third-largest banking market. The deal was also seen as a test of whether South Korea would live up to a pledge to open its financial sector wider to international investors.

But a July 31 deadline to complete the deal passed without regulatory clearance because of ongoing legal disputes surrounding Lone Star's investment activities in South Korea.

The original agreed purchase price of was 43 percent above KEB's Thursday's close.

CEO Richard Wacker said in a speech to staff that KEB would work with Lone Star to find "a new shareholder that shares our goals for the future."

(Additional reporting by Park Jung-youn, Lee Shin-hyung, Marie-France Han, Tony Munroe and Steve Slater; Editing by Anshuman Daga and Erica Billingham)