Shinsei and Aozora banks to merge

The banks, backed respectively by JC Flowers and Cerberus, will create Japan’s sixth largest banking group.

Two struggling Japanese banks backed by private equity firms will combine operations to better weather the financial downturn. Japan’s Shinsei Bank, in which JC Flowers owns a 32.6 percent stake, and Aozora Bank, in which Cerberus Capital Management owns a 50.2 percent stake, will merge operations pending shareholder approval in 2010.

The combined entity will be the sixth largest banking group in Japan with total assets of about ¥18 trillion ($186 million; €132 million) as of 31 March 2009, the banks said in a joint statement.

Following the merger, Aozora shares will be delisted from the Tokyo Stock Exchange and shareholders in Aozora will be allocated one Shinsei share for each Aozora share they own. Shinsei will continue to be listed.

The two banks have been in talks for more than two months and a merger between them has publicly been endorsed by the Japanese government. Both banks suffered losses last year, with Shinsei reporting losses of ¥143 billion and Aozora reporting losses worth ¥243bn.

“As the business environment in Japan has rapidly evolved, it has become imperative for financial institutions to improve competitiveness by attaining sufficient scale and by strengthening their capital bases,” the firms said.

Cerberus originally acquired a 49 percent stake in Aozora Bank for ¥101 billion in 2003.

JC Flowers first invested in Shinsei (then known as the Long-Term Credit Bank of Japan) alongside Ripplewood Holdings and other investors in 2000. The consortium acquired the bank in a deal worth $1.2 billion. Following a restructuring programme, they sold their stakes in the bank in tranches and reduced their voting rights to 2.56 percent.

Flowers invested in the bank for a second time in November 2007 and acquired a 32.6 percent stake for $1.8 billion.

The merger will be effective October 2010.