Jeremy Warner's Outlook: HSBC outsmarted in quest for Korean bride

Post Office calling; Dire Christmas
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The Independent Online

Standard Chartered seems almost as pleased at having trumped its bigger rival HSBC, in acquiring Korea First Bank as with the $3.3bn acquisition itself. This is rarely a good sign, as it generally means the winner will have overpaid in its eagerness to outdo the competition. Yet in this case there's good cause for a more optimistic view.

Standard Chartered seems almost as pleased at having trumped its bigger rival HSBC, in acquiring Korea First Bank as with the $3.3bn acquisition itself. This is rarely a good sign, as it generally means the winner will have overpaid in its eagerness to outdo the competition. Yet in this case there's good cause for a more optimistic view.

Judged on the earnings multiple being paid, the price does indeed look on the expensive side, but at 1.87 times book value, it is less than Citigroup paid for KorAm last year and it is actually about the same as HSBC was planning to offer until it was caught napping over the Christmas holidays.

HSBC had been the front runner to buy Korea First, but believing Standard Chartered would struggle to raise the finance, it allowed its exclusive period of negotiation to time expire and retired for the Christmas festivities. This gave Mervyn Davies, chief executive of Standard Chartered, his chance. With the backing of UBS, which has fully underwritten a £1bn issue of equity, he was able to nip in and do the deal in a matter of weeks with vendors who had plainly become frustrated with HSBC's less than committed approach to the task in hand.

HSBC seems to have been asleep at the wheel. All the same, this is a transformational deal for Standard Chartered, in a way it wouldn't have been for the much larger HSBC, and is therefore quite low risk for the bank. Mr Davies will need all his banking skills and some to make it pay dividends and HSBC may yet have the last laugh. Much of the upside in the bank's struggle back to financial health after the Asian crisis of the late 1990s has already been had by First Korea's 49 per cent private equity owners, Newbridge Capital. The US-based venture capital group more than triples its money with yesterday's deal.

What's more, Standard Chartered has no presence in South Korea, which means there are no synergies or cost savings to be had. Korea First is also only the seventh largest bank in the country. Too big to be niche but too small to be in the premier league, this is generally not a comfortable space to occupy.

Even so, Standard Chartered ought for now to be given the benefit of the doubt. Mr Davies has long had his eyes set on South Korea, which is the world's eighth largest economy and the fourth largest in Asia, and he's right to do so. South Korea already bears some of the hallmarks of a fully developed economy, yet it still has all the ambition of less well developed Asian tigers.

Its consumer electronic and automotive industries are already second only to those of Japan, but its people are more garrulous, less tired and they are possessed of a greater determination to better themselves. The South Korean economy and banking system is also now on a sounder footing than back in the dark days of the Asian crisis, when crony capitalism, questionable accounting and bad lending ruled the roost.

Transformed from the mainly industrial lender it once was into a more consumer orientated bank, First Korea is well positioned to exploit South Korea's continued economic growth. First Korea is these days more of a mortgage bank than anything else, and with only 30 per cent of households owning their own property, there's plainly enormous scope for expansion. Mr Davies could have bought Korea First far more cheaply had he struck when the Asian financial crisis was at its worse. But other acquisitions in the region were pre-occupying him at the time, and it is not clear that back in the late 1990s he could ever have won boardroom backing for such a high-risk gamble.

Standard Chartered has come to look like the perpetual bridesmaid, always in waiting, never quite marching to the altar itself. First it was outbid for KorAm. More recently it was Absa in South Africa. Now Mr Davies has finally bagged his deal. Has he chosen well in South Korea?

All these one-time Asian economic miracles live in terror of being swamped by the development stories of China and India, yet the Davies view that they will all grow rich together is probably the better way to bet. Korean unification, which despite the seemingly intractable obstacles may be closer than imagined, would be the icing on the cake.

Post Office calling

A lot has changed since the GPO was last in the telephone business and the only choice was whether the handset came in cream or green. Today, there are many more colours to chose from along with a bewildering array of add-on services from 1471 and ring-back to call-waiting, not to mention five mobile operators to chose from. In other ways, however, change has been slower in arriving and British Telecom, which used to be part of the GPO until Margaret Thatcher discovered privatisation, still has nearly 80 per cent of the residential fixed-line market.

The Post Office, which is still 100 per cent government-owned, reckons it can grab a slice of this business. Plans to reenter the home phone market will be unveiled this morning. Telecoms is a crowded place these days, with more than 100 different operators jostling for position. In the fixed-line market these include some serious players such as Centrica, Carphone Warehouse and Spain's Telefonica.

The posties reckon they can use the power of the brand and their 15,000-strong branch network to sign up one million households within three years, which would give them about 5 per cent of the market. Unlike most other new entrants, the Post Office has also decided to buy its line rental capacity from BT, so that customers will only need to receive one bill instead of two if they opt for a rival - except when they also take broadband from BT. In the parlance this is known as "owning the full customer relationship".

A move into phones is a logical progression for the Post Office from home loans, car insurance and credit cards. It is also something which has been forced upon the organisation after the Government chose to remove a big chunk of its traditional market by paying state benefits direct into bank accounts rather than over the counter.

BT is complaining as usual and has already suggested the Post Office would be better off sticking to selling stamps and fishing licences if it wants to keep the public happy. It hasn't, so far, complained that the new service will amount to unfair state competition. That really would be a blast-from-the-past. But since the whole idea of the new service is to help defray the losses being clocked up on the traditional business of delivering the mail, It's hardly a complaint that's likely to fly. Besides, BT has been challenging the Post Office on its own patch for more than a decade now. It's called e-mail and it comes down the telephone line.

Dire Christmas

So it's official - well almost, anyway. According to the British Retail Consortium, which represents most British Retailers other than Philip Green, high street sales were down 0.4 per cent in December on the same month the year before - the worst hiatus in spending growth since March 2003, just before the Iraq war. The BRC only confirms what anecdotal evidence was suggesting long before last week's rash of bleak retail trading updates. For many retailers, Christmas was pretty terrible.

It seems unlikely, none the less, this will push the Monetary Policy Committee into cutting interest rates this week. A slowdown in debt-fuelled consumption and house prices is precisely what the Bank of England has been trying to achieve. Even today, rates remain only 1.25 percentage points above their low point. Having marched rates only half way up the hill to achieve the desired slowdown, the Bank won't be turning tail any time soon.

But nor, it can now safely be said, will the MPC be carrying on up. The "neutral" level for UK interest rates seems to have been established at a point lower than anyone would have dreamed possible, even as recently as a year ago.

jeremy.warner@independent.co.uk

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