Shinsei, Aozora End Merger Talks - WSJ.

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MAY 15, 2010

Shinsei to Raise Up to $1.1 Billion as Aozora Talks End

TOKYOJapan's Shinsei Bank Ltd. said it may raise up to $1.1 billion after scrapping merger plans with capital-rich rival Aozora Bank Ltd. on Friday. The bank also said that Chief Executive Masamoto Yashiro, 81 years old, will retire and cede his title to Shigeki Toma , a director at Isuzu Motors Ltd. Mr. Toma's appointment is subject to shareholder approval at a meeting on June 23.

Bloomberg News Aozora's Brian Prince. Shinsei, which is one-third-owned by J.C. Flowers & Co., needs cash to shore up its capital base, which was one reason it had sought the merger with Aozora, but executives didn't specify how the

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Shinsei, Aozora End Merger Talks - WSJ.com

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capital would be raised. Speaking on a conference call, Shinsei Chief Financial Officer Rahul Gupta said there were various ways the bank could improve its capital ratios and there was no urgency to act. "We do not need to rush to the markets to raise capital, so it can wait 30 to 60 days for Mr. Toma to make an assessment." Mr. Gupta said that Shinsei could dispose of noncore assets, mainly overseas asset-backed investments, valued now at a few hundred billion yen within three years. "The size of capital boost won't exceed 100 billion yen," Mr. Yashiro said at a news conference. Disputes over capital are what ended Shinsei's and Aozora's marriage plans. "We did not feel that a sufficient capital ratio for the combined entity would be achieved, so we decided to go our own way," Aozora's Chief Executive Brian Prince said in an interview. "All the other issues could have been overcome." He declined to specify the capital target. When the two banks announced their engagement on July 1, Shinsei needed to shore up its capital and Aozora, majority-owned by Cerberus Capital Management LP, was facing a liquidity crunch. Combined, the two banks would have created Japan's sixth-largest lender at the time, giving them bulk and a tacit guarantee from the Japanese government if the global financial crisis deepened. But there was a clause in the alliance agreement saying both parties had to be comfortable with the combined entity's capitalization. Shinsei's Tier 1 capital ratio improved marginally from 6.02% at the time of the agreement to 6.35% as of March 31. But Aozora's remained much higher at 15.23% as of March 31.

Bloomberg News Shinsei's Rahul Gupta. Aozora and Cerberus tried to renegotiate the 1for-1 merger ratio in their favor said people familiar with the matter. In the final months of the merger talks, executives trooped into integration talks and then sat around the table exchanging pleasantries without making significant progress on the merger, according to one person familiar with the matter. Shinsei had warned on Monday that it would report an annual loss, triggering a formal end to the talks and a call between Mr. Prince and Mr. Yashiro midweek calling off the merger, said a person familiar with the matter. On Friday, Aozora said it swung into the black for the fiscal year ended March. The bank posted a net profit of 8.3 billion yen for the year, up from a loss of 242.6 billion yen a year earlier.

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But Shinsei reported its second straight year of losses, recording a 140.15 billion yen net loss, little changed from last year's shortfall of 143.08 billion yen. The deal's collapse leaves the two lenders facing the daunting prospect of building sustainable businesses on their own in an overbanked market and under watchful eye of regulators. Shinsei's losses prompted Japan's banking minister, Shizuka Kamei, on Friday to vow closer scrutiny. "We should intensify our oversight and guidance," he told journalists. The state bailed out the two banks during Japan's bad-loan crisis in the 1990s and it still owns a 23.9% share of Shinsei, and about 22% of Aozora if its preference shares were converted. Mr. Kamei said he had scolded his staff for allowing the losses to accumulate and lashed out at what he saw as Shinsei managers' relatively high pay levels. Shinsei shares closed down 4.5% at 106 yen, while Aozora's stock dropped 5% to 114 yen. But executives are hopeful of a turnaround. "Now the merger confusion is behind us, Aozora's stock price should perform independently of other people's issues," Mr. Prince said. Both banks forecast modest profits for the fiscal year ending March 2011. Aozora said it expects a net profit of 14 billion yen, while Shinsei predicted a net income of 12.5 billion yen. "We've only reached the fourth inning of the baseball game. There's still a lot of work to be done. Now we need to make sure that we win the remaining innings," Mr. Prince said. Analysts have criticized Aozora for not clearly defining its stand-alone strategy, but Mr. Prince hit back saying that tying the bank to one path was unwise right now. "Globally the new business model has yet to be

defined, so our goal is to operate safely, soundly and provide a return but not get ahead of ourselves," he said, "We're trading safety for earnings for a while because of the global market place." Write to Alison Tudor at alison.tudor@wsj.com

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