UPDATE: Shinsei Buys GE's Japan Finance Operations For $5.4 Billion
Friday July 11st, 2008 / 11h44
(Adds confirmation of deal, comment from Standard & Poor's, background details.) By Atsuko Fukase and Kenny Maxwell Of DOW JONES NEWSWIRES TOKYO -(Dow Jones)- Ambitious midsized lender Shinsei Bank Ltd. (8303.TO) said Friday it has agreed to pay $5.4 billion in cash to acquire General Electric Co.'s (GE) Japanese consumer finance business in a long-awaited buyout that could kickstart further consolidation in the country's strained moneylending industry. But the price tag is nearly twice analysts' original estimates of what the U.S. conglomerate's Japanese finance businesses might be worth. And at nearly four-fifths of its own market value of $6.9 billion, the deal highlights Shinsei's determination to ratchet up operations in the country's hard-pressed moneylending industry. The size of the deal means GE, set to report second-quarter earnings later Friday, will hit the ground running as it gears up for a slew of asset sales to speed its recovery from a poor first quarter. But while Shinsei said the Y580 billion it's paying will come from "internal funding sources," ratings agency Standard & Poor's put the bank's A- long-term credit rating on watch with negative implications shortly after the deal's announcement. Shinsei said the deal, which it expects to close by end-September, should be immediately accretive for earnings per share. But S&P said, "The proposed acquisition will likely have a negative impact on Shinsei Bank's credit quality." Japan's consumer lenders have been squeezed lately by both sluggish economic growth and tighter regulations. Under the tougher operating rules, the country's highest court imposed a cap on loan interest rates and ruled that consumer finance firms should refund to borrowers past interest payments that were deemed by the court to be excessive. Under the term of the transaction, the bank would cover such excessive costs caused by "gray zone" rule, up to Y203 billion and if it exceeds Y260 billion, GE would have to cover it. The bank said the bank's maximum gray zone liability for assets subject to the indemnity is Y206 billion. That's had the effect of stoking pressure for industry consolidation, and GE's Lake business, bought 10 years ago, also attracted interest from peers Acom Co. (8572.TO) and Promise Co. (8574.TO), the industry's largest player by loans. As well as the Lake brand, Shinsei is buying GE's Japanese mortgage loan and credit card businesses. Earlier this year Shinsei said it would ramp up consumer finance operations as it develops its retail banking network, and indicated mergers and acquisitions were on the cards. The Y580 billion acquisition is a quantum leap for Shinsei, adding to its existing but tiny consumer lending units Aplus Co. (8589.OK) and Shinki Co. (8568.TO). But for all its hefty price tag, Shinsei's beefed up consumer finance business will still be ranked only fifth by loans, a long way behind industry leader Promise, Acom, Takefuji Corp. (8564.TO) and Aiful Corp. (8515.TO). The president said the bank values the "Lake" brand and expects to originate getting new customers. That won't please investors who are fans of the management philosophy developed by Jack Welch, business guru and GE's boss for 20 years before current incumbent, Jeffrey Immelt. While at GE, Welch developed a strategy for GE that influenced generations of U.S. CEOs: GE should be either the biggest or second-biggest in all its businesses - or exit them. Indeed, reports the deal was about to be struck sent Shinsei shares more than 4% lower in Tokyo. Eventually they closed 3% lower at Y358 apiece, while the Nikkei index of Tokyo's blue chips ended 0.2% lower. "In the short term, the purchase could be a negative factor for Shinsei given the consumer finance industry is still being affected by tighter regulations," said Mitsushige Akino, general manager at Ichiyoshi Asset Management. Worsening economic conditions in Japan could even lead to loans souring, Akino said, adding it's hard to imagine an immediate profit boost from the purchase. Moreover, concerns about the ability of Japan's consumer lenders to raise funds needed to shore up their balance sheets have swirled in the markets since late June, when a Lehman Brothers analyst questioned consumer lender Aiful Corp.'s (8515.TO) fundraising ability. Aiful said it is financially sound and vehemently denied the analyst's report. And earlier this week Promise spooked investors by abruptly scaling back plans to issue a convertible bond, citing shaky market conditions. That sent the lender's shares down over 10%. The Lake deal comes as General Electric in the U.S. tweaks plans to sell a raft of assets. The conglomerate it seeking to overhaul its huge and multifaceted portfolio, ranging from credit cards to aircraft engines to television broadcasting, following disappointing first-quarter earnings. On Thursday the company said that rather than selling just its $7.2 billion appliances business, it's now mulling a spinoff of its entire consumer and industrial division. -By Atsuko Fukase and Kenny Maxwell, Dow Jones Newswires; 813-5255-2957; atsuko.fukase@dowjones.com Click here to go to Dow Jones NewsPlus, a web front page of today's most important business and market news, analysis and commentary: http://www.djnewsplus.com/al?rnd=drIHRBj%2B6VfZ9WYRcX%2F%2B1A%3D%3D. You can use this link on the day this article is published and the following day.
