AIG's Korean deal at risk again

By Alex Frew McMillan CNN Hong Kong

SEOUL, South Korea (CNN) -- American International Group's deal to buy management control of Hyundai Securities looks set to fall apart, again.

American executives have walked away from their due diligence on the brokerage and two other financial units of Hyundai.

They left no word when or if they'd return, Hyundai Securities said Tuesday.

The deal would be the largest overseas investment in South Korea's history. But it ran aground on price as soon as it was announced in August.

Those issues were thought to have been resolved in September, when the sides signed a memorandum of understanding.

Hyundai Securities, Korea's third-biggest brokerage, allowed minority shareholders to buy in at the same price the Americans are getting on stock in Hyundai Securities.

But AIG and its team have now tagged extra demands onto the investment. They want Hyundai Securities to pay higher dividends on its preferred shares and let them be switched into stock within a year.

South Korean negotiators have reacted angrily. One Hyundai executive called the demands "nonsense," according to the wire service Reuters.

A litany of trouble

It's another setback for a deal that is becoming a textbook example of the perils of offshore investing.

In August, AIG and its partner W.L. Ross & Co., a specialist investment company that picks up "distressed assets" like Hyundai, agreed to pay 1.1 trillion won ($850 million) for management control of the three companies.

The Korean government also agreed to pay 900 billion won, bringing the total deal to 2 trillion won.

But that set a price tag of less than 8,000 won on Hyundai Securities stock. Hyundai executives said Korean law prevented them from selling stock at a discount of more than 10 percent.

In the end, they agreed to make up the difference in price that forces the AIG team to pay in other ways.

American executives familiar with the deal say the Korean government jumped the gun by announcing the investment before it had been finalized.

AIG's chairman, Maurice Greenberg, also admitted there might have been a communication problem.

November signing looks unlikely

After the MOU put that issue to rest, the sides were supposed to cement the deal in November. This hitch puts that in jeopardy.

Besides the Americans walking out of the due diligence, Hyundai scrapped a recent business briefing with AIG.

South Korea's Financial Supervisory Commission, which overseas banks and bank reform, insists talks between the two sides are continuing.

"Hyundai and AIG are currently discussing details on the investment method and procedures," the commission said in a statement. "The two parties are sincerely engaged in negotiations for a final contract."

The Americans have complained in the past about how toughly the Koreans have negotiated on the deal. They claimed they were ready to walk away if they didn't get the right price.

Hyundai Securities stock was down 5.5 percent Tuesday afternoon, at 7,200 won. It had risen as high as 11,150 won on optimism about the deal -- part of the problem over price, since the speculation drove up the value of the company.

South Korea's private sector and its government have been trying to reform since the Asian financial crisis in 1997. The crumbling of the Korean currency led to skyrocketing overseas debt for many companies.

In the aftermath, South Korea nationalized many of its banks. It has been searching for overseas buyers for financial companies ever since.

Though the International Monetary Fund originally criticized the pace of reform in Korea, the IMF has praised recent efforts.

The Korean economy has held up better than most in the current economic slowdown because the country has progressed further than its Asian neighbors, economists say.