DealTalk: BankUnited owners cash in, FDIC nurses loss

NEW YORK Thu Jan 27, 2011 12:20pm EST

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NEW YORK (Reuters) - Veteran banker John Kanas gets to cash in big time on one of the most profitable bank buyouts in years when BankUnited goes public on Thursday.

But the Federal Deposit Insurance Corp, which estimates it lost $5.7 billion in selling the failed Florida lender to the Kanas-led private equity consortium, faces awkward questions about whether it should sell assets in a fire sale.

Kanas invested $23.5 million in BankUnited as part of a consortium of private equity interests who bought the Miami Lakes, Florida bank from the FDIC for about $900 million after it failed in May 2009. He was named the CEO.

After the IPO, the stake he will control will likely be worth more than $130 million, or more than five times his initial investment. In addition, he will recoup the $23.5 million through the sale of some shares in the IPO.

And his returns could get even bigger if the shares rise after the offering and as the bank grows.

That isn't all. His compensation, including salary and stock, totaled $39.7 million over the past two years.

Kanas, 64, who also made about $185 million when he sold New York-based North Fork Bancorp to Capital One Financial Corp (COF.N) in December 2006, has done better than his partners in the deal, though they are hardly suffering.

The overall investment by the consortium that included Wilbur Ross' WL Ross & Co, Blackstone Group (BX.N) and Carlyle Group CYL.UL are set to more than double in value after the IPO.

The returns fall short of the storied purchase of the failed Long-Term Credit Bank of Japan, which was renamed Shinsei, by buyout firms J.C. Flowers and Ripplewood Holdings in 2000.

That deal returned about six times the initial investment in the IPO in 2004, and at its peak the stock traded up to around nine times that investment. The size of the profit stirred controversy in Japan at the time, given the government spent 3.6 trillion yen ($43.7 billion) to clean up LTCB's debts.

BankUnited would have a market value of $2.3 billion if it sells shares at $24 apiece, the mid-point of the $23 to $25 IPO price range. In the summer of 2009, investors bought in at about $10 per share.

BankUnited's IPO is the first for a major failed institution taken over by private investors during the financial crisis.

The returns are in stark contrast to the cost of the BankUnited failure to the FDIC, a federal agency that is largely funded by banks and whose main role is to insure deposits in those banks.

Indeed, the size of the profits from the IPO is prompting doubts about the strategy regulators adopted during the crisis.

"At the height of a financial crisis do you want to be selling a lot of stuff really cheap? My opinion all along was, no," said Campbell Harvey, finance professor at Duke University.

Others also questioned why the authorities couldn't have nursed the bank back to health first before selling it at a higher price.

"One has to wonder why have we set this up in such a way that if you're rich enough to be able to buy a bank it will be so easy for you to make all this money," said Eileen Appelbaum, senior economist at the Center for Economic and Policy Research, a liberal think tank in Washington, though she did stress that the investors had played by the rules of the game.

The FDIC, which took warrants in a bid to share in a possible turnaround of BankUnited, is expected to get only $25 million from the IPO.

The FDIC now estimates the BankUnited deal will cost the fund about $5.7 billion. But spokesman Andrew Gray said the regulator also saved about $1.5 billion on BankUnited by avoiding having to liquidate the failed bank.

"The BankUnited IPO will result in more capital for the institution and a more diverse group of owners," Gray said. He noted that the FDIC had been on the hook for $9.34 billion of the bank's deposits at the time of the failure.

In a sign that the FDIC may have had second thoughts about what happened in the sale, it subsequently did tighten regulations for private equity purchases of failed banks.

BankUnited's stock could rise as the bank expands operations in the U.S. Southeast and New York, experts said. It's IPO is already oversubscribed, sources familiar with the matter said.

For investors in the IPO, "it's buying into a franchise that has the potential to go from Florida to New York with a group of very experienced investors and managers," said Chip MacDonald, a banking lawyer at Jones Day.

EXPANSION PLANS

The IPO, which will see existing shareholders sell 22.3 million of the 26.3 million shares being offered, is likely to make it easier for BankUnited to buy other failed institutions.

FDIC deals for failed banks with loss-sharing agreements come with a lock-up period that can keep investors from taking the bank public.

BankUnited passed on a few failed bank deals to avoid a long lock-up period, a source familiar with the situation said. But going public now solves that problem.

Moreover, as a public company BankUnited may find itself on a much stronger footing with regulators who have been cautious about letting private equity into banking.

BankUnited plans to have about half dozen branches in New York City after a non-compete agreement between Kanas and Capital One ends in August 2012.

BankUnited's IPO is also benefiting from the success of First Republic Bank (FRC.N), another private equity-backed bank that went public last month, said Josef Schuster, founder of Chicago-based investment firm IPOX Schuster.

First Republic's stock has traded up nearly 20 percent since its debut. Schuster is looking to invest in BankUnited.

The bank's three largest investors -- Ross, Blackstone and Carlyle -- plan to sell down their holdings to 15.9 percent each from 22.1 percent. So their profit is still mostly on paper.

Centerbridge Partners, which owns 17.3 percent, will sell its stake down to 12.5 percent.

Other investors in the bank, including LeFrak Organization, the Davy Global Opportunities Fund and East Rock Endowment Fund, are also selling down part of their stakes.

The shares of BankUnited, which had $11.2 billion in assets and 78 branches as of September 30, will begin trading on the New York Stock Exchange on Friday under the symbol "BKU."

(Reporting by Paritosh Bansal and Clare Baldwin; Additional reporting by Megan Davies in New York and David Clarke in Washington. Editing by Martin Howell)

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