Vulture Sell-Off Will Find Only Slim Pickings

(Bloomberg Opinion) -- Japan’s banking sector has become a dead zone for private equity. Yet even then, the latest attempt by J. Christopher Flowers to sell Shinsei Bank Ltd. seems like a zombie franchise that has run a few episodes too long.

Flowers and his firm JC Flowers & Co., together the largest shareholder in Shinsei, face a major challenge in offloading their stake following a failed attempt two years ago, when potential buyer Anbang Insurance Group Co. was caught up in China’s debt crackdown. On Friday, the lender announced that Flowers was making a fresh try with other investors to sell  43.5 million shares in a secondary offering in Japan and abroad, worth around $700 million. 

If successful, the sale will be the latest sequel in a tale of distress that Flowers entered in 2000, when the former Goldman Sachs Group Inc. banker and U.S. private-equity firm Ripplewood Holdings LLC picked up Shinsei’s predecessor, Long-Term Credit Bank of Japan, from the ruins of the Asian financial crisis after it had been bailed out by the Japanese government.

Flowers initially did well in what was  the first-ever foreign acquisition of a Japanese lender.  Its 2004 float, dubbed  the most profitable private equity deal of all time, more than doubled his firm’s money. Ripplewood largely exited soon afterward. The process gave international investors a reputation as vultures among the Japanese public that they’re only now beginning to shake. 

Vulture Sell-Off Will Find Only Slim Pickings

But the mid-tier bank has always been an odd beast in Japan’s banking firmament. Like Aozora Bank Ltd., the other lender that private-equity firms acquired during the crisis, Shinsei is neither a regional bank serving conservative borrowers who prefer local lenders nor one of the top three banks with massive branch networks and cozy ties with Japan Inc.

It has meant that Shinsei was always seeking a niche that never quite worked out. Consumer lending took a blow in the mid-2000s when the government capped interest rates. A foray overseas into the U.S. mortgage market blew up in the 2008 financial crisis. More recently, Shinsei tried to jazz up its image as the go-to, technologically savvy bank, but so is everyone. Having cafes inside branches isn’t enough.  All this took place against a backdrop throughout the sector of negative interest rates and aging demographics.

In the end, there’s no better proof of Shinsei’s challenges than the fact that it has taken Flowers so long to sell, a rarity in a private equity world where 10 years tends to be the maximum. Ironically, the bank’s stock had been up 25% this year on signs of some success in consumer loans. The news of the upcoming Flowers exit hammered it back to 9%. 

With Flowers and his firm reducing their stake, the Japanese government will be Shinsei’s largest shareholder. Shinsei is the only bank left from the 1990s bailout era in which the government retains a major stake, according to Lightstream Research analyst Mio Kato, who writes on Smartkarma. Its presence will hang over the shares, whose offer price will be decided between Aug. 20 and Aug. 23.

This is a deal that’s going to be a hard sell. 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Nisha Gopalan is a Bloomberg Opinion columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

©2019 Bloomberg L.P.

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