Japan's Orix, Credit Saison in merger talks

TOKYO Tue Aug 5, 2008 7:03am EDT

TOKYO (Reuters) - Orix Corp (8591.T), Japan's largest leasing company, and credit card firm Credit Saison (8253.T) are in merger talks, financial sources said on Tuesday, in a further sign of consolidation in the country's hard-pressed consumer lending sector.

Shares of Credit Saison, worth $4 billion at current market prices, surged 11.2 percent, while those of Orix, a company three times its size, rose 2.6 percent.

Combining the two would create a finance group with $106 billion in assets as Japan's financial sector battles tighter regulations in consumer lending and the global credit crunch, even as a slowing economy has hurt Orix's core lease business.

"We may not just be talking about these two companies. We could see a flurry of consolidation after this," said Mitsushige Akino, chief fund manager at Ichiyoshi Investment Management.

Orix has sounded out Mizuho Financial Group (8411.T) about selling its shares in Credit Saison to open the way to a deal, two sources close to the matter told Reuters. Mizuho is the company's top shareholder with a stake of 11.7 percent.

Both sources were briefed on the talks but are not authorized to speak on the record as the deal is not yet public.

The two companies issued statements saying they already worked together and have talked about deepening the relationship, but added that nothing had been decided on the reported merger.

Credit Saison president Hiroshi Rinno has said previously that he aimed to turn his company into a comprehensive non-bank firm like Orix, without hinting at any possible merger with Orix, a Credit Saison spokesman said.

Any deal will likely hinge on whether Mizuho agrees to sell its stake in Credit Saison, concerns analysts said had limited the rise in share prices for both firms.

"The focus is now whether Mizuho would let go of Credit Saison, as they have several operational ties including a joint venture to process credit card transactions," said Minoru Hattori, analyst at Okasan Securities.

"If Mizuho okays the plan, it would be a positive merger, combining the ideal set of retail and wholesale financing operations. An overlap would basically be limited to the real estate business, which accounts for little of their assets."

INDUSTRY WOES

The consumer finance industry in which Credit Saison operates has been crippled by regulations lowering maximum interest rates and legal rulings that have forced firms to repay previous charges deemed illegally high.

Those conditions have prompted General Electric Co (GE.N) to sell its Japanese consumer finance arm to Shinsei Bank Ltd (8303.T) for $5.4 billion and Citigroup (C.N) to withdraw from the market.

The Nikkei business daily said Orix and Credit Saison were working towards a basic agreement next month to create a non-bank financial group with assets of 11.5 trillion yen ($106 billion).

One source said the talks were still at an early stage and it was not clear exactly how the merger would be carried out. If Orix were to buy Credit Saison outright, it would cost about 423 billion yen ($4 billion) at the current market price.

Orix had about $3 billion in cash as of the end of March.

It gets about one-fifth of its revenues from its leasing business in Japan but is also a force in real estate, and has also diversified into areas including venture capital, life insurance and corporate loans.

Orix brought in 1.15 trillion yen in revenues in the past business year, dwarfing Credit Saison's 346 billion yen.

"We'll need to watch how much the alliance can streamline the businesses, cut costs and produce synergies, though we may not be able to expect much as Orix is a huge company," Ichiyoshi Investment's Akino said.

Mizuho Securities analyst Koichi Niwa said Japan's real estate market could cause the two troubles over the near term.

Stricter building standards, weak demand for apartments and tighter lending by banks have contributed to a rash of bankruptcies in the sector in the past few months, and it could become more difficult for them to sell properties for profit.

"But over the longer term they would be able to take advantage of increased financing capabilities for real estate," Niwa said, adding that Credit Saison's card services could be used to help Orix in offering financing to small and medium-sized corporate clients.

Shares of Orix rose to 15,070 yen, but have still halved in the past year. Credit Saison's stock hit 2,330 yen, but have fallen about a quarter this year.

($1=108.20 Yen)

(Reporting and writing by Aiko Hayashi and Yumiko Nishitani; Editing by Chris Gallagher and Rodney Joyce)

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