A group of investors led by U.S. buyout firm J.C. Flowers & Co LLC will bid about $1.8 billion for up to 32.6 percent of Shinsei Bank Ltd, putting more money into the Japanese bank it helped resurrect in one of the most lucrative private equity deals ever.
The deal came as Aozora Bank Ltd, another mid-sized bank revived and floated by overseas investors, said separately on Tuesday it would form a business alliance with the larger Sumitomo Trust & Banking Co.
The two deals underscore the scramble by Japanese banks to tie up with each other to boost efficiency and find new areas for growth as core lending remains sluggish and they sustain losses from U.S. subprime investments.
The Tokyo bourse's index of bank stocks has lost 30 percent of its value so far this year, underlining the bleak outlook for lenders in the world's second-largest economy.
The banking sector has been totally unattractive because of the earnings outlook, the fact that interest rates aren't rising and with worries about subprime, said Mitsushige Akino, chief fund manager at Ichiyoshi Investment Management.
But these deals force investors to look at the sector in a different light. This could be the start of realignment.
The J.C. Flowers-led group, which includes Grupo Santander and Swiss Re, will bid for a 22.7 percent stake in Shinsei at 425 yen per share from November 22 to January 10, offering a 17 percent premium to Monday's closing share price.
Shinsei also plans to issue 50 billion yen in new shares, which would result in the group and affiliates of J.C. Flowers holding up to 32.6 percent in Shinsei. J.C. Flowers held 5.5 percent as of the end of March, according to Reuters data.
At $1.8 billion, the deal is the largest ever private equity acquisition of a Japanese bank, according to Thomson Financial.
CONSUMER FINANCE IN FOCUS
Shinsei President Thierry Porte said the capital injection would allow the bank to increase the reach and effectiveness of its current operations, especially its consumer finance business.
We believe there is merit -- which perhaps some parts of the market don't agree with -- that there is merit in focusing on the consumer finance business and building a new model, Porte said in an interview with Reuters following the announcement.
Profits of Japan's consumer loan firms have suffered since the government imposed new caps on the interest rates they can charge.
Shinsei has been hit by valuation losses due to declines in the share prices of two of its consumer loan affiliates, Aplus Co Ltd and Shinki Co Ltd. Shares of Aplus have lost more than half their value this year, while Shinki has lost more than 67 percent.
But Porte said he had no intention of cutting Shinsei's ties to the ailing industry.
We are not pulling out, Porte said. We think we can make a better business out of this ... It needs some fresh thinking, which we have.
Shinsei's stock jumped 9.3 percent to close at 398 yen on the news, while Aozora's shares rocketed up 6.9 percent to 340 yen and the banking sector index gained 0.9 percent.
But J.C. Flowers will still be buying at a much cheaper level than it might have been a few months ago. Shinsei's shares are down 43 percent this year, hurt by its exposure to Japan's sickly consumer finance industry and subprime-related losses.
The Flowers-led consortium will become Shinsei's largest shareholder, ahead of the government, which currently holds a 12.7 percent share in the bank.
Christopher Flowers, the ex-Goldman banker who heads the buyout firm, partnered with private equity firm Ripplewood to buy the failed Long-Term Credit Bank of Japan in 2000 for $1.2 billion at the height of Japan's economic downturn and banking crisis.
They renamed the bank Shinsei, meaning new life, and took it public in 2004.
The deal, which was later recounted in the book Saving the Sun, earned its initial backers more than several times their initial investments and became known as one of the most profitable buyouts in history.
(Reporting by Taiga Uranaka, Nathan Layne and David Dolan, Editing by Michael Watson)