The latest deal activity in Tokyo brings some intriguing twists in the oft-troubled saga of some top US buyout groups in Japan and their key investments: Shinsei Bank – 33 per cent owned by buy-out king Chris Flowers – and Aozora, 49.7 per cent owned by Cerberus.
It also suggests that both Flowers and Cerberus have decided that enough is enough, after some abysmal losses at both banks have all but wiped out the killings they made on the banks’ listings in another, happier and more lucrative era.
Now, it seems, Shinsei and Aozora banks are planning to merge their operations – possibly as early as autumn next year – in a move that could create Japan’s sixth-largest banking group with assets of about Y18,000bn ($188.7bn), as the FT reports on Thursday.
The talks to combine the banks, both nationalised during Japan’s banking crisis in the late 1990s and subsequently acquired by the US buyout groups, come after a very bad year for both Shinsei and Aozora, featuring heavy losses for both.
Investors heartily welcomed the news, driving up Shinsei’s shares more than 7 per cent in morning trade to Y156 and Aozora up nearly 6 per cent to Y147. Some were quipping that perhaps the name of the newly merged bank would combine “aozora” – meaning “blue sky” – with “shinsei”, or new life, to be called “Shinzora” – or “new sky”.
It sounds kind of bright and hopeful, although we doubt Flowers and Cerberus are setting much store by the name.
As Lex noted back in April when the Shinei-Aozora merger speculation first surfaced, “knocking two weak banks together” doesn’t necessarily solve their problems. On Thurday, analysts greeted news of the potential merger with scepticism. As the FT notes on Thursday:
Both banks have had to revise their strategies to focus more on domestic lending after disastrous investments overseas. But their domestic networks are limited and they face fierce competition from much larger and better positioned rivals.
One banker close to the situation said merger talks were likely to be complicated, due to the many parties involved.
Mr Flowers, who raised his Shinsei stake to 32.6 per cent less than two years ago at a price of Y425 a share, is sitting on a massive loss on that investment. Cerberus, which has been battered recently by the problems afflicting the companies it has invested in in the US, such as Chrysler and GMAC, has watched Aozora’s share price tank from the Y325 a share it paid in 2008 to increase its stake.
Meanwhile, the Japanese government, which still has public funds invested in both banks, will be keen to ensure it does not dent the public purse further.
Even back in April, amid the first merger rumours, Lex described the idea of a Shinsei-Aozora merger as “a distraction”.
Synergies are negligible. Branch closures, for example, would be minimal, with the combined network just 54-strong. Fusing the two would still leave a bank with no real niche, albeit with a slightly sturdier position. Aozora has capital (its 14.8 per cent tier one ratio is almost embarrassingly robust) that Shinsei (with 6.6 per cent tier one capital and existing hybrids trading at a paltry 20-30 cents per $1) needs. In turn, Shinsei brings funding, courtesy of its big deposit base, which would help ease Aozora’s high loan/deposit ratio.
Despite the “modest upside of combined funds”, quite how the banks would profitably deploy them remains a mystery, it added
Neither Shinsei’s gambit to go after Japanese consumer finance nor Aozora’s foray into international markets turned out well. There are practical hurdles too, including the terms of any merger. Aozora and Shinsei both trade at 0.4 times book value. But, while Aozora has aggressively written down dud investments, Shinsei is more coy on some of its holdings. Knocking two weak banks together does not make it easier for the government to bail out of them. Nor does it eliminate the need for further public funds.
Thursday certainly seemed the day for change among some of Japan’s weaker banks, as news also broke that Ashikaga Holdings, owner of the failed Japanese regional lender acquired by investors led by Nomura last year, plans to sell shares in an IPO in the second half of 2010.
Nomura, Japan’s biggest brokerage, and other investors bought the nationalised Ashikaga Bank from the government last July for about Y280bn ($2.9bn), giving Nomura about 50 per cent of Ashikaga Holdings.
Bloomberg reports on Thursday that Nomura aims to return Ashikaga to profit this year and list the lender on the Tokyo Stock Exchange in 2010. The bank posted a deficit of Y6.6bn in the year ended March 31 after recording a Y30bn loss on stock investments and bad-loan charges rose 44 per cent to Y20.8bn. While Ashikaga forecasts a profit of Y16.5bn for the current fiscal year, it still has some serious issues to work through.
To further complicate matters, it also emerged Thursday that Shinsei and Aozora have asked Norito Ikeda, former president of Ashikaga Bank, to become president of the merged bank, although Ikedia has not yet accepted the proposal, according to the Nikkei newspaper.
Perhaps for now Ikeda is getting into some “new sky thinking”.
Related links:
Japanese banks - Lex
Sumitomo and Aozora slash profit forecasts – FT
Shinsei suffers record loss – FT
Aozor chief Sacasa steps down – FT