Advantage Partners is closer to winning regulator's approval for its $2.5 billion acquisition of regional lender Tokyo Star Bank Ltd after several breakthroughs in recent weeks, according to sources familiar with the matter.

Japanese private equity firm Advantage Partners is set to acquire 68 percent of Tokyo Star from Dallas-based Lone Star, and at the same time buy out minority investors via a tender offer. Tokyo Star would then return to private hands.

The price paid to Lone Star and the tender offer are said to be close to 410,000 yen ($3,557) per share. There are 700,000 issued shares according to Reuters data giving a 287 billion yen ($2.5 billion) takeout price for all Tokyo Star's equity.

Tokyo Star's shares closed at 294,000 yen on Friday.

Consensus has been reached between Advantage Partners, Lone Star and Japan's financial watchdog the Financial Services Agency on the structure of the deal and the sale price.

There have been breakthroughs in the talks in the last week, said one of the sources.

Advantage will submit its final official application shortly, and the FSA is expected to give its approval in the coming months. The regulator has the power of veto over any buyer of a stake of 20 percent or more in a Japanese bank.

Tokyo Star said it was not in a position to comment.

CONSENSUS BUILDING

Advantage Partners was awarded exclusive negotiation rights to buy Tokyo Star several months ago, and since then it has been in talks with the FSA and Lone Star.

Concern has grown among investors and bankers alike as time has passed that the talks might stumble. The unfolding crisis in global credit markets, originating in the U.S. mortgage market, has only served to heighten their fears about the highly leveraged deal.

Tokyo Star's shares are down 25 percent since June 14, when reports emerged that a hedge fund at Bear Stearns was scrambling to sell mortgage-backed loans. The Japanese banking index has fallen 24 percent in the same period.

Talks with the regulator have taken longer than expected due partly to changes in personnel at the FSA and some concerns about the structure of the deal and private equity ownership, sources said.

Private equity funds pay for companies using some of their own capital and loans from lender banks, typically using the target company's assets and cash flows as security.

In the case of Tokyo Star the collateral for these loans is shares in the bank. If the bank performs badly, the value of the equity will slide.

The banks making a 160 billion yen five-year loan to a special purpose vehicle set up by Advantage are Merrill Lynch, Italy's UniCredito, Shinsei Bank and Calyon, the investment banking of France's Credit Agricole SA.

Merrill was also on the hook for 60 billion yen in mezzanine financing, but given that credit spreads have risen considerably on more risky bonds the size of the mezzanine tranche has been cut slightly.

The banks expect to syndicate the debt to foreign banks and institutions, but may end up holding on to some of the debt in the current environment. Japanese banks are unwilling to take up the slack because they want to avoid double gearing, where financial companies use shared capital to buffer against risk.

REAPING REWARDS

Tokyo Star operates 35 branches and had deposits of 1.5 trillion yen as of March, according to its Web site.

Lone Star acquired Tokyo Star's predecessor, Tokyo Sowa Bank, in 2001 for 40.4 billion yen after the second-tier regional lender collapsed under a pile of problem loans.

The fund unloaded a third of Tokyo Star in a public share listing for 430,000 yen per share in October 2005, making a seven-fold return on its acquisition in just four years.

Lone Star tried to sell its stake in Tokyo Star to Nikko Cordial Corp last year, but the FSA failed to rubber stamp the deal. Soon afterwards, Nikko Cordial became embroiled in a scandal involving the group's merchant banking arm.

The sale to Advantage will mark Lone Star's final exit from a profitable six-year investment.

Japan Investment Merrill Lynch