MBK, a suitor in the sale of Woori Finance, is in talks with Canada Pension Plan Investment Board (CPPIB), to get the latter onboard as a financial investor in the potential deal, reported the Chosun Ilbo. The report cited an unspecified pension fund source for the information. The source told the paper that David Denison, the president and CEO of CPPIB, is currently in South Korea to attend the International Pension Conference. The potential investment could be decided during the visit, the source was cited as saying.
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:
All I can tell from this is 1) CPP is very willing to invest in equities now as compared to 10 years ago and 2) public equities makes up almost 40% of their portfolio, making Woori Financial stock "in mandate".
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.
J Trust, the listed Japan-based financial services company, announced today that it will acquire a 64.16% stake in South Korea-based Kyungeun Mutual Savings & Finance.
J Trust said that it would spend JPY KRW 25bn (USD 23.6m), or 5m shares at KRW 5,000 per share, to acquire a 64.16% stake in Kyungeun Mutual Savings & Finance during August 2011, once the planned deal is approved by South Korean authorities.
We covered this deal on July 5th - it is now done and announced!
J Trust, a listed Japanese financial holding company, is seeking to acquire South Korean Kyungeun Mutual Saving & Finance, reported Korea Economic Daily. The report cited industry sources as saying that J Trust is currently conducting due diligence in the privately held Kyungeun, to be completed on 11 July.
Kyungeun Mutual Saving & Finance, based in Ulsan city, has total operating assets of KRW 350bn (USD 329m) as of end of March 2011.
If you do not work in an investment bank and you are thinking - what! What are these strange names of companies that I have never heard of before?? That's ok, because I work in corporate finance in a financial institutions group and I had never heard of them until today either.
I had some vague idea of what a Korean mutual savings bank was - I always thought of them as small scale localized banks which served city and village communities, but I wasn't sure so I went to the first place I would go to find information:
1. Wikipedia
Ok, this is not usually the case but Wikipedia was completely useless this time around. Forget this source, next!
2. Korean Banking Regulator
I'll be honest, I had no idea who regulated Korean Banks. For anyone reading who doesn't even know what that means, let me give a quick example: in China banks are regulated by the China Banking Regulatory Commission (CBRC), in Hong Kong banks are regulated by the Hong Kong Monetary Authority (HKMA).
This is an easy fix though, simply google "Korean banking regulator". WHAT?! I obviously spoke too soon, because that query produces nothing. Next I tried "central bank korea" and found it - it is the Bank of Korea. Fortunately there is an English version of the site which is sufficiently comprehensive. I should drop a note here to all of you that CBRC's website is much more comprehensive in the Chinese version versus the English version of the site. This is to discriminate against non-Chinese reading bankers, obviously. Smart move by the Chinese government.
Browsing through the BoK website, the closest page I found to anything useful describing mutual savings bank was this one. It tells me that as of Sep 2010 there are 106 mutual savings banks in the country. Otherwise this was not very helpful at all. I am starting to feel a little bit frustrated.
3. Google search for news and research reports
This is something I usually like to do last, because it will never systematically give me the correct information. But I can scan headlines quite quickly to find the relevant ones, and I very quickly came across this article.
"South Korea's savings banks traditionally offer loans, often at higher interest rates than the major banks, to working-class people and companies that don't have strong enough credit or collateral to obtain loans elsewhere. In 2005, when low interest rates fueled a property boom, savings banks ramped up real-estate project financing, leaving them exposed to loan defaults in the wake of Lehman Brothers' collapse in 2008."
Final Commentary
There is a mountain of data to be collected and sorted through, but tomorrow's work can be done tomorrow. Consolidating what I have found out so far:
- Mutual Savings Banks are for the most part quite similar to commercial banks. They are also regulated by BoK but subject to slightly different regulations than commercial banks (i.e. no ownership restrictions). There are 106 of them.
- Their customer bases are generally less credit-worthy individuals, who also lack collateralizable assets
- It appears they have a bias towards real estate loans for companies and individuals, but this has yet to be confirmed with reliable statistics
- Many of them were at risk of collapsing post-2008 due to loan defaults. Several experienced bank runs. The Korean government is desperate to cushion the fall and is considering either bailing them out or facilitate stake sales to larger and more stable financial institutions
So far the rumour seems credible enough. We would obviously have to deep dive into both those companies to know more, something which I intend to do at a later date. One final thing I noticed is that the rumour quoted "total operating assets" - makes it seem likely that Kyungeun Mutual Saving & Finance (actually I now believe it should be spelt "Kyong Eun") may have a negative tangible equity position, or at least, is not sufficiently capitalized to the extent that any potential acquiror would have to inject capital in order to maintain its operations.
