Last hurdle removed for bittersweet Lone Star exit

A court ruling today which found global investment firm Lone Star guilty of stock price manipulation could pave the way for the US group to finally offload its stake in Korea Exchange Bank. The firm has been fined and its former head of the region, Paul Yoo, jailed for three years, according to media reports.

The Seoul High Court ruled that Lone Star Funds was guilty of manipulating the stock price of the Korea Exchange Bank (KEB) during its 2003 acquisition of the business, which valued it at £1.3 billion (at the time worth €1.4 billion; $1.6 billion), according to press reports. Lone Star was fined $21 million by the court, and Paul Yoo has been jailed for three years. 

Lone Star Funds declined to comment.

Lone Star bought 51 percent of KEB in 2003 before trying to sell it three years later for $7.3 billion, sparking a public backlash against the private equity firm, which was perceived as making a massive tax-free return on the deal. 

Prosecutors then revealed they would be investigating the original acquisition of the bank, arguing Lone Star’s ownership was illegitimate due to the manipulation of its stock price at the time. 

Since then, Lone Star has been embroiled in a legal battle which has hitherto prevented it selling its stake in KEB. In November 2010 the firm made its third attempt to sell its stake in the bank, this time to financial services company Hana Financial Group. The sale was to be valued at $4.1 billion, but was stalled by the bank’s labour union. 

According to Thursday’s ruling, the Korean Financial Services Commission said Lone Star was unfit to be the major stakeholder in the company, which could lead to regulatory bodies forcing Lone Star to sell the majority of its stake in the bank, according to the reports. Although this is exactly what Lone Star has been trying to achieve, speculation has arise that the regulatory authorities could impose conditions on the sale. 

Furthermore, the $21 million fine, reduced from the previous fine of $26 million reported by PEI in December 2010, is a minimal sum considering the size of the expected return if the Hana Financial sale goes through. 

Lone Star has reportedly already recouped its investment in KEB through a series of block sales and dividends, so a successful sale would deliver significant upside for the group.