Japan’s private equity-backed banks Shinsei and Aozora have mutually agreed to cancel their plans for a merger, ten months after an alliance agreement was signed by them.
The banks did not provide any reasons for the termination of the merger.
Shinsei Bank, in which US private equity firm JC Flowers owns a 32.6 percent stake, and Aozora Bank, in which Cerberus Capital Management owns a controlling 50.2 percent stake, had agreed to merge their operations in July last year. Plans for a merger materialised as a result of both Shinsei and Aozora suffering annual losses to the tune of ¥143 billion and ¥243 billion respectively.
The two banks were to merge at a 1:1 ratio. A completed merger would have led to the formation of the sixth largest banking group in Japan with total assets of about ¥18 trillion (€154.5 billion; $194 billion) as of 31 March 2009, the banks said in a joint statement at the time the merger was announced.
A merger between the two banks was publicly endorsed last year by the Japanese government, which is a significant shareholder in both the banks with a 24 percent stake in Shinsei and a 22 percent stake in Aozora.
In 2000, a JC Flowers and Ripplewood Holdings-led consortium acquired the Long-Term Credit Bank of Japan in a deal worth $1.2 billion and renamed it Shinsei. Following a restructuring of the bank’s operations, the firms sold it in what is regarded as one of the most lucrative private equity deals ever. Ripplewood and Flowers made about ¥2.2 billion in advisory fees immediately after the transaction, plus $2.1 billion in profits from the bank’s IPO, and later earned $2.8 billion when they sold a one third stake in the bank, to reduce their voting rights to 2.56 percent.
The firms did not pay any capital gains tax on the proceeds from the sale, leading to criticism and outrage domestically. In 2005, the Japanese government subsequently imposed a tax on foreign private equity firms' capital gains from deals – which came to be commonly known as the “Shinsei tax”. That tax has now been scrapped.
Flowers came to the rescue of the bank for a second time in November 2007 after a 43 percent decline in the value of its shares in 2007, by acquiring a 32.6 percent stake for $1.8 billion.
Cerberus originally acquired a 49 percent stake in Aozora Bank for ¥101 billion in 2003.
The two banks, in separate statements, said they will consider establishing a new business alliance with one another and maintain a cooperative relationship.