As reported, MBK Partners has submitted letters of intent to acquire a controlling stake in Woori Finance, which has a market capitalisation of KRW 11trn (USD 10.3bn).
To say you "know" Asia FIG M&A, you really must know a little something about two recent massive Korean banking M&A deals. The sale of Korea Exchange Bank by private equity fund Lone Star to Hana Financial is one. This pending sale of a 57% stake in Woori Financial Holdings is another. MBK had already been linked to a potential deal for a long time, but what is new about this rumour is the name Canada Pension Plan ("CPP"). Here, I should mention that I have certain affiliations with Canada, and indeed I have friends who work at CPP right now.
In this post I will cover the corporate profile of CPP, a history of the deal the Woori Financial opportunity, and my thoughts on future outcome.
Corporate Profile of CPP
The Canada Pension Fund Investment Board is exactly as its name suggests - it manages a large fund of money that is used to pay pension benefits to Canadian citizens. The fund size is approximately USD150bn, which is huge. For comparison, it is around the same size as Temasek of Singapore. Here are two charts which are quite informative but does not help to confirm anything:
Last point to mention on CPP is that, man, these guys do A LOT of deals! Scrolling through their news releases, we see that they do a deal almost every 2 weeks! There does not seem to be any particular focus either - 1) some investments done in a consortium with other investors and some alone; 2) Investments have been done across various geographies; 3) Investment sizes range from USD200mn to USD2bn. One thing to notice though, is that there do not seem to be many precedents of them acquiring stakes above 50%.
History of Woori Financial opportunity
Woori Financial Group is listed both on the Korea Stock Exchange and the NYSE, with a current market cap of approximately USD10.5bn. In 1997 during the Asia financial crisis, the government rescued it with taxpayer money, and as of currently maintains an approx. 57% stake in the group. Based on market cap, the stake is valued at around USD6bn. A quick summary of key events:
- The government first toyed with the idea of selling its holding in late 2010, but this was eventually held off due to poor market conditions.
- Then in early 2011, Hana Financial, a strong potential suitor for Woori, acquired KEB from Lone Star instead.
- Similarly, an employee-led group of Woori looking to acquire the Government's stake walked away due to disagreements on price. The group wanted to acquire the stake in small blocks at a minimal premium to market price, whereas the Government expected a management control premium on its block stake.
- Korea Development Bank was interested in the deal, but public criticsm prevented a deal from happening on the grounds that KDB was another government owned bank, so it would not be a true privatization process.
- Most recent rumoured interested buyers are KB Financial, MBK Partners, Vogo Fund and TStone Corp.
Also important to the deal are the 3 stated objectives of the Government in selling down the stake:
1) Maximization of public funds
2) Smooth and rapid privatization
3) Development of the Korean banking industry
Final Commentary
In my opinion there are 3 types of buyers for Woori:
1) Private equity funds: I think this is a possible outcome, however, a USD6bn price tag is typically too large for an average hedge fund. This ties back to today's rumour piece where MBK is said to have solicited CPP to form a consortium. There are also some additional issues for private equity funds, such as government aversion to private equity profit taking (as in the Lone Star / KEB case).
2) Foreign banks: No deal. Neither Citi nor Standard Chartered could make it work, it seems highly unlikely anyone would still want to try. Last I heard (a few days ago) there were massive union strikes at the SC First Bank building which crippled over 50% of Standard Chartered's Korean operations. Maybe HSBC would like to try (they did try to bid for KEB before) but I doubt it.
3) Domestic banks: Selling to a local bank would encourage healthy industry consolidation. However, with KDB has been ruled out and Hana having already done a large acquisition, there seems few remaining financial institutions with the appetite for a USD6bn deal. I can only think of 2 other names - KB Financial and Shinhan Financial. My view is that the sale process will be long and drawn out, but ultimately one of those two will end up being the acquiror. Probably KB Financial.
Actually there is a 4th possibility - the acquiror can be a non-bank company, or even non-financial services. But I don't have sufficient insight on this, and it seems unlikely that such a company would put itself at risk by buying one of the largest banking institutions in Korea without prior banking experience. I wouldn't rule it out though, particularly for some nation-wide conglomerates, like Samsung or Hyundai or SKTelecom or something.
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