Simultaneously, Shinsei says it will raise Ñ50 billion through the issue of 117.6 million new shares at the same price as the tender offer. The new shares will also be sold to the tender offeror JC Flowers (JCF) and JCF's co-investors, Swiss Re and Grupo Santander. Following the transaction, the buyers will hold 32.6% of Shinsei. The total consideration for both offers amounts to Ñ202 billion ($1.8 billion).
J Christopher Flowers, the former Goldman Sachs banker and founder of JCF, currently owns 5.95% of Shinsei's outstanding shares and is the controlling partner of an entity holding 4.48% of the bank. He is also currently a director at Shinsei. Santander Investment held a 4.42% stake prior to the deal.
All of the investment vehicles in the consortium name J Christopher Flowers as their representative. There is no breakdown of the share ownership between JCF and the other investors.
Morgan Stanley was hired to give a fairness opinion to Shinsei, and would not comment on the transaction.
The two-step transaction means some old shareholders will be cashing out at a premium. The second part, involving the acquisition of Ñ50 billion worth of new shares, means fresh money will bolster the balance sheet. However, the second part of the deal is contingent on JCF getting the full 22.7% in the first phase.
The transaction appears to have management support and senior staff such as CEO and president Thierry Porte will be given the opportunity to invest in the deal.
The tender offer price represents a premium of 20.7% over the average closing price of the bankÆs common shares for the past three months; a premium of 24.4% to the one-month average and a premium of 16.8% to the closing price prior to the announcement. Over the past three years, the share price has dropped from Ñ826 in March 2005 to Ñ375 on November 19.
ôThe new money will bolster the bankÆs financial resources, improve its capital ratios and position its institutional banking arm to take advantage of investment and acquisition opportunities,ö says a press statement released by Shinsei.
ôThe transaction signals that JCF reckons that the bankÆs share price trading at these low levels is unjustified,ö comments one banker.
The comment makes sense, since the Tokyo stockmarket has been roiled by the credit crunch and a mixed economic performance over the past two quarters. The Nikkei 225 has slumped to 14,700 points from over 18,000 points in early October. ThatÆs one of the worst performances in Asia. In a press release issued by Shinsei, however, any intention to take the company fully private is apparently denied with the words ôShinsei Bank will maintain its listing on the Tokyo Stock Exchangeö.
In any case, even the partial privatisation (buying 22.7% from existing minority shareholders) has already helped push up the share price while consolidating the new investors' control. The stock closed up 9.3%.
Final control of Shinsei has not been released, but the press release states that the deal is contingent on the approval of the Japanese prime minister for JCF to acquire voting rights ôgreater than the bank major shareholder threshold provided by the Banking Lawö. This could mean voting rights in excess of the size of the stake.
ItÆs the second time the Japanese lender has been taken over by a private equity firm. Shinsei was previously known as the Long-Term Credit Bank of Japan (LTCB), but was nationalised during the country's disastrous recession after it collapsed under the weight of its non-performing loans.
It was then controversially bought off the government by US private equity fund Ripplewood in 2000 and listed in 2004. The controversy surrounds the fact that the government ended up buying a large portion of the worst debt back off the bank (in accordance with the agreement with Ripplewood), following which the private equity firm went on to execute a successful Tokyo listing. The perception was that the Japanese taxpayer had shouldered an unfair part of the burden.
Shinsei Bank, partly run by senior foreign managers, has carved a niche for itself by offering consumers slick and efficient banking services, including the only English-language internet banking service and 24-hour ATMs. However, it has been hit by its acquisitions of stakes in consumer finance companies. These were rocked by recent legislation cracking down on loan rates û which even permitting borrowers to request a refund on excessive interest payments.
Interestingly, part of the proceeds of the sale, apart from expanding the retail banking channel and the institutional banking business, are earmarked to expand the scope of ShinseiÆs consumer finance businesses, ôincluding support for companies such as APLUS and Shinkiö. These two are consumer finance companies in which Shinsei has stakes.
Shinsei made a loss in the fiscal year ending March 31, 2007, amounting to Ñ61 billion. Shinsei has total assets of $107 billion and a network of 43 outlets.
Japanese banks are facing a profitability crisis at the moment, partly because they have not diversified sufficiently out of plain vanilla lending. In addition, legislation prevents the formation of integrated æuniversal banksÆ on the Western model. Consumer finance is still generally in the grip of the consumer finance companies.
Shinsei has these obstacles to overcome, as well as the challenge of finding a private equity firm which can put it on the road to sustained profitability.
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