UPDATE 3-ESFG, Credito Agricole to dilute BES stakes in rights issue

Tue May 27, 2014 4:57pm EDT

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(Updates with Credito Agricole)

By Axel Bugge and Sergio Goncalves

LISBON May 27 (Reuters) - Portugal's Espirito Santo Financial Group will subscribe to Banco Espirito Santo's 1.045-billion-euro ($1.4 billion) rights issue to the extent that its stake in the country's biggest listed bank will fall 2.4 percentage points, ESFG said on Tuesday, causing BES shares to rise.

The group is already the largest shareholder in BES.

"ESFG, which now holds 27.4 percent of BES capital, has decided to exercise its subscription rights in the offering of new shares that allows it to hold about 25 percent of BES capital," it said in a statement.

At the same time, French bank Credito Agricole - another major shareholder in BES, said it would take a dilution in the rights issue as well, reducing its stake to 15 percent from its current holding of 20.1 percent.

ESFG and Credito Agricole - which together have controlled BES - will reduce their joint holding to 40 percent from 47.5 percent after the rights issue. They will also offer up to 999.6 million of their rights in BES' capital increase through an accelerated bookbuilding process to investors, BES said.

BES warned in the rights issue prospectus last week that auditors recently found irregularities at holding company Espirito Santo International, which ultimately controls ESFG. ESI's parent Espirito Santo Group has since said it plans to sell assets and carry out a capital increase in one or more of the companies it owns to correct the situation.

BES had also said in the prospectus last week that the rights issue by the bank could be hit by "reputational" risk from ESI because BES had sold some ESI debt to its retail customers.

But ESFG said the amount of commercial paper issued by ESI that is still held by BES retail clients now stands at just 300 million euros, down from 1.7 billion euros at the end of 2013.

"The complete repayment of these issues should be concluded at the beginning of December 2014," ESFG said on Tuesday.

ESFG also on Tuesday posted a first-quarter net loss of 37 million euros, mostly due to provisions and impairments, after a loss of 13 million euros a year ago.

Shares in BES jumped after ESFG said it would maintain much of its stake after the rights issue - the first day of trading in subscription rights for the cash call, which was launched on May 15.

Separately, a source at BES said the bank had launched a roadshow for the rights issue to cover 14 European financial centres, with a focus on 200 institutional investors.

"There is an average of 10 meetings and conference calls scheduled per day, with a target of 200 institutional investors, including the biggest investment funds," the source said.

The roadshow started on May 21 and will end on June 4.

Shares in BES closed 7.4 percent higher at 0.943 euros by, off an earlier day's high of 0.976. ESFG's shares were down 0.5 percent at 2.780 euros.

"The reduction of ESFG's stake is not as big as expected, which means that the selling pressure on the rights that some expected is not there," said Albino Oliveira, an analyst at Fincor brokers in Lisbon. ($1=0.7325 euros) (Additional reporting by Andrei Khalip, Editing by Greg Mahlich and Mark Heinrich)

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