Ten Years Later

merrill.jpgNobody knows better than South Korea how elusive the floor can be when markets are crying fire-sale. Pushed to the wall during the Asia Crisis a decade ago, the country’s banks had their assets priced in the pennies-on-the-dollar range. Here now, with the shoe squarely on the other foot, is Korea Asset Management, a government debt clearer that says its purchase of illiquid Merrill Lynch debt securities is faltering over price. Local media reported in July that Kamco planned to raise up to 2 trillion won ($1.98 billion) to buy U.S. non-performing loans with Shinhan Bank and Mirae Asset Securities. Kamco had said it was in the process of raising about $1 billion to buy distressed mortgage assets from U.S. banks and expected double-digit returns from its investments. Hardly the kind of buying clout that Merrill faced when it agreed to sell $30.6 billion of collateralized debt obligations to a Lone Star affiliate in July for 22 cents on the dollar. If nothing else, execs at Lehman Brothers will be watching this high-stakes haggling with much nervous interest as they negotiate with another South Korean state-owned institution, Korea Development Bank, over a possible joint investment in the CDO-laden U.S. investment bank.

Other deals of the day:

* Novolipetsk Steel, the Russian steel maker owned by billionaire Vladimir Lisin, has agreed to pay $400 million in cash to acquire U.S. hot-rolled steel maker Beta Steel and expand its presence in North America.

* InBev is to hold an extraordinary shareholders meeting on Sept. 29 to vote on its planned $52 billion takeover of Anheuser Busch and related matters.

* Private equity firm Advent International has taken a majority stake in Swiss duty-free retailer Dufry by means of a share swap that combines it with the U.S. firm’s airport retailer Hudson. Dufry, which already held an 11.2 percent stake in Hudson that it bought in April, said it was swapping Hudson’s common stock for Dufry equity and refinancing its approximately $390 million in debt. The total value of Hudson’s equity is $446 million.

Cheerleader Support

A high school cheerleader holds up a fellow student during the Japan Cup 2008 cheerleading competitionTurns out, Korea Development Bank is in talks with Lehman Brothers – but now, after the government threw cold water on prospects for a solo KDB investment, the question has become which local bank will be partnered up with the state-run bank for this bold investment. KDB was to be a “cheerleader” rather than the main player in any deal, the government said. KDB CEO, Min Euoo-sung, headed Lehman’s local operations until earlier this year, so he’s well placed to wield the pom-poms. Investors there are nervous – which they should be given Lehman’s more-than $60 billion of mortgage and mortgage security exposure. South Korean bank shares tumbled today as markets pondered which mighty institution might be encouraged to step up. Names to keep in mind are Shinhan Financial Group, Woori Finance Holdings and Hana Financial Group. How much Lehman might a KDB-backed venture buy? Min said one possibility was for KDB to form a consortium with private banks to jointly buy Lehman. Pricing remains an issue, of course. The Telegraph reported Lehman had stepped up talks with KDB to raise as much as $6 billion in a share sale that could be concluded this week.

Other deals of the day:

* Natural gas producer Chesapeake Energy said it agreed to sell a 25 percent interest in its Fayetteville Shale assets in Arkansas for $1.9 billion to BP America, a unit of BP.

* The world’s third biggest platinum producer Lonmin said a merger with Xstrata would lead to major synergy benefits and the firm would like to hold talks with its hostile suitor if a formal bid is made at a higher level.

Only Cheerleaders Need Apply

A member of professional cheerleading squad practises for the 2008 Beijing Olympic Games and Paralympic Games in Dachang CountyThe yo-yo that is Lehman Brothers’ stock took another spill before the market opened on Monday, after a top South Korean regulator threw cold water on the idea of a state bank buying the battle-scarred Wall Street warrior. Financial Services Commission Chairman Jun Kwang-woo told reporters Korea Development Bank (KDB) should be a “cheerleader” and let local private banks take the lead in any such purchase. KDB’s interest lit a rocket under Lehman’s shares on Friday. When asked about the status of KDB’s possible interest in Lehman Jun said: “That would be an international marriage. Would you get married just after one or two blind dates?” A couple of blind dates might be a step up from the shot-gun buyouts that South Korea’s banks faced after the Asia crisis.

Canada’s Precision Drilling Trust will buy U.S. driller Grey Wolf for $2 billion in cash and stock, creating one of the largest North American oil and gas rig operators. The announcement comes a month after Grey Wolf shareholders voted down a proposed purchase of well-servicing company Basic Energy Services. Precision Drilling, Canada’s largest oil and gas driller, first made an unsolicited purchase offer for Grey Wolf in June. News that a deal had been struck emerged on Sunday. Based on financial results through June, the combined companies will have annual revenue of $1.8 billion.

Germany’s Commerzbank could buy insurer Allianz‘s Dresdner Bank possibly by the end of this month, according to a source familiar with the situation at the bank. German weekly Welt am Sonntag said an agreement between the two was possible within the coming week. The two companies had agreed on the basic principles of the transaction, according to the paper, which said Commerzbank would buy Dresdner for slightly more than 9 billion euros ($13.38 billion) and Allianz would vouch for writedowns on the balance sheet of Dresdner of up to 1 billion euros. The sums were still being negotiated. Allianz would have a stake of slightly less than 30 percent in the merged bank, the report also said.

Hope yet for a Lehman Seoul mate

Lehman BrothersJust yesterday, the sound of doors closing could almost be heard echoing across the pacific as Lehman Brothers reportedly hit the Asian wealth circuit looking for help filling its expected $4 billion in third-quarter writedowns. Now state-run Korea Development Bank says it might be interested in buying the bank, lighting an 8 percent fire cracker under Lehman’s stock in premarket trade. “We are studying a number of options and are open to all possibilities, which could include (buying) Lehman,” a KDB spokesman said. KDB said it was open to mergers or acquisitions of both domestic and foreign companies to beef up its weak areas as the government was aiming to privatize it by 2012. Previous reports said KDB and CITIC Securities, China’s biggest brokerage, balked at the high price Lehman was asking.

Since its long-standing dispute with CME Group‘s Chicago Board of Trade over trading rights is just about settled, the Chicago Board Options Exchange may soon become a takeover target. While the CBOE is expected to pursue an initial public offering, with a filing possible as soon as next month, many exchange industry experts see that as only an interim step. It will be like sticking a “for sale” sign up, they argue. Despite being the top U.S. equities options market, with a stranglehold on index options, the CBOE may have to consider a bigger partner. It is one of the few remaining stand-alone exchanges, which leaves it vulnerable to a squeezing of its margins by growing competition, particularly exchanges that can offer investors stocks and options under the same roof.

Mining giant BHP Billiton‘s $128 billion bid for rival Rio Tinto could raise competition issues in iron ore. With mines across Australia’s ore-rich Pilbara region, Rio Tinto and BHP are the world’s second- and third-largest iron ore producers, respectively, behind Brazil’s Vale, and analysts reckon a combined group would control about 35 percent of the world’s seaborne traded iron ore. In a nine-page “statement of issues” ahead of its Oct.1 ruling, the Australian Competition and Consumer Commission (ACCC), which can order companies to sell assets if it thinks they have too big a hold in one sector, highlighted the likely impact of a deal on the iron ore trade and, in particular, on Australian steelmakers, but saw no major competition issues in copper, gold, uranium, bauxite or alumina. “I don’t think that’s a surprise to the two companies, particularly BHP … that iron ore would be the one area the regulators would be looking at very closely,” said Ken West, a partner at Perennial Growth Management. “But the Pilbara is the one they don’t want to be tampered with. If the regulators don’t show flexibility, then the Pilbara could become a deal breaker,” West said.

Lehman’s long march

Staff member displays Chinese yuan notes to media at currency exchange booth at Songshan airport in TaipeiAsia’s sovereign wealth funds may be loaded, but they don’t need long memories to recall the big losses they’ve suffered on seemingly sure-thing investments in Wall Street’s troubled banks. So with reports that Lehman Brothers came up empty in efforts to win funds from top Chinese brokerage CITIC Securities and state-owned Korea Development Bank, it’s anybody’s guess where it will come up with the cash it needs to deal with an expected $4 billion in writedowns before announcing results in September.  

The path most traveled heads further east, to Singapore and the gulf, where investors could be equally, if not more gun-shy given the news flow. A ray of hope could shine from Singapore though. State investment firm Temasek said it was prepared to plunk more money into Western banks. An Singapore sling couldn’t come at a better time. This morning, Citi’s Prashant Bhatia became the latest big bank analyst to warn on Lehman and fellow investment banks Goldman and Morgan Stanley, lowering third quarter estimates for all three, and The Wall Street Journal says the Fed had called Credit Suisse last month to see if it had pulled a credit line from Lehman, acting to prevent a repeat of the cascading speculation that helped sink Bear Stearns.

U.S. private equity investor Lone Star is buying the rump of lender IKB, Germany’s most prominent casualty of the subprime crisis. The sale by state bank KfW closes an embarrassing and costly chapter for Europe’s biggest economy. IKB nearly collapsed a year ago under the weight of $24 billion in investments linked to risky U.S. home loans, making it Europe’s first major victim of the global financial crisis. The government brokered the first of three rescues to avert what the country’s banking watchdog warned could trigger Germany’s biggest financial crisis since the 1930s depression. But as the cost of the rescues spiraled towards 10 billion euros ($14.8 billion), Berlin started looking for a buyer.