HSBC has agreed to buy a 51 percent stake in Korea Exchange Bank (KEB) from U.S. private equity firm Lone Star for about $6.3 billion in cash to boost its profile in Asia's third-largest banking market.

The deal, if approved by government and regulatory bodies, will mark Lone Star's exit from a controversial investment in South Korea and allow the private equity fund to more than quadruple its initial investment in KEB.

HSBC, Europe's biggest bank, said on Monday it would not make an offer to remaining KEB shareholders and that South Korea's sixth-biggest bank would retain a local listing.

The London-based group, which announced on August 20 it was in exclusive talks to buy the stake, said the deal would boost its earnings in the first full year of ownership. It said the purchase price would increase by $133 million if the deal was completed after January 31, 2008.

The offered price is very high. But the real key is whether the government will approve it, said Hana Daetoo Securities analyst Han Jeong-tae.

For domestic banks such as Kookmin, the deal is a strategic miss and they have to hurry up and change their strategies.

HSBC Finance Director Douglas Flint was optimistic the London-based group would be able to secure the deal.

We believe we have the credentials to put ourselves in a very favorable light, he told Reuters.

He denied that HSBC was overpaying for the stake, which had a market value of about $5.1 billion.

We see opportunities in working together that make the transaction worth what we are prepared to pay. We are very comfortable with the price and we think it is fair to all parties, he said in a telephone interview. The price that we are paying is comparable to other transactions (in Korea).

At 6:05 a.m. EDT, HSBC shares were down 0.1 percent at 896.5 pence within a FTSE-100 index up 0.4 percent. KEB closed down 1.7 percent at 14,600 won before the deal was announced, underperforming a 0.5 percent rise on the KOSPI index.

UNCERTAINTIES

A deal would be the second-largest acquisition in South Korea's financial sector after Shinhan Financial Group's $7.2 billion acquisition of LG Card in 2006 and comes after Citigroup and Standard Chartered bought Korean banks.

But HSBC may have a long, tough battle to win approval from local regulators.

South Korea's Financial Supervisory Commission reiterated that it would not approve the sale of Lone Star's KEB stake until all legal issues surrounding it had been resolved.

Prosecutors say a former government official colluded with a lawyer hired by Lone Star and KEB's chief executive to inflate KEB's losses, allowing Lone Star to buy it in 2003 for around $900 million less than it was worth.

The allegation is being reviewed by a Seoul district court.

The head of the South Korean unit of Lone Star, Paul Yoo, has meanwhile been standing trial on suspicion he tried to lower the share price of the former credit card unit of KEB by spreading incorrect information and thus to making it cheaper to absorb the card unit.

The protracted legal tussle led the U.S. investment fund to cancel a $7.3 billion agreement to sell KEB to top local bank Kookmin last November.

We cannot help but monitor the situation as we have said we are interested in KEB, a Kookmin spokesman said.

KEB had no immediate comment.

Singapore's DBS Group Holdings said in June it had ended talks to buy Lone Star's stake in KEB, hinting at legal issues to explain why it walked away from KEB.

Lone Star has already recouped its $1.2 billion investment in KEB, through the sale of a 13.6 percent stake in the bank in a block trade for $1.3 billion in June.

(Additional reporting by Mark Potter, Miyoung Kim and Marc Jones in London and Marie-France Han in Seoul)

South Korea Investment HSBC