HSBC may extend deadline to secure Korean deal

HSBC is poised to extend the deadline on its £3 billion bid for Korea Exchange Bank (KEB) before the deal falters and fails to plug a gap in its Asian business portfolio.

With regulatory and legal obstacles to the deal expected to remain in place beyond this autumn, sources close to HSBC told The Times that the bank was now “highly likely” to extend the terms of its offer beyond the July 31 deadline which expires next week.

Sources said HSBC may also seize the opportunity to renegotiate the high price it is paying for its entry into the Korean banking market – an opportunity that seemed worth paying a hefty premium for when the deal was mooted last September, but may be less attractive now that the Korean economy has slowed.

Failure to complete a deal would be a major embarrassment for HSBC has already been thwarted twice in attempts to crack Asia’s third largest economy.

Analysts said that HSBC may already have started positioning itself for more months of regulatory battling.

Earlier this week, the bank signed an agreement with KEB’s labour union in which it made a series of striking concessions. They included an agreement that the majority of the post-takeover seats on KEB’s board would be filled by Koreans and a commitment not to lop headcount.

Analysts at CLSA said that, viewed logically, HSBC should probably walk away from the deal: HSBC is seen by most investors as paying well over the odds to be in Korea, and that its M&A focus should be trained elsewhere in Asia.

HSBC’s bid for KEB involves paying around $6.3 billion to the Lone Star Funds for the 51 per cent controlling stake the US-based venture capital group currently holds in the Korean lender.

The prospect of Lone Star’ extremely lucrative exit from the investment it made in 2003 has ignited strong anti-foreigner sentiment within the more conservative sections of Corporate Korea – an attitude thought to be behind the delays which the HSBC bid has encountered.

The principal block to the deal arises from the financial regulator’s refusal to approve the takeover until Korea’s highest court issues a ruling on allegations of stock price manipulation around the time that Lone Star bought KEB.

Behind the regulatory delay is a clash of interests between the regulators and the beleaguered government of Lee Myung-bak.

Mr Lee won a huge election victory late last year with promises of a more business-friendly administration. The first five months of his presidency have seen anti-foreigner attitudes more deeply entrenched and mass demonstrations in the streets.