Saxony state sells SachsenLB to LBBW

By Lars Rischke

DRESDEN, Germany (Reuters) - The government of the eastern German state of Saxony on Sunday decided to sell its stricken lender SachsenLB to Stuttgart-based LBBW LBBW.UL for what sources said was 300 million euros in a move that speed further bank consolidation.

The bank was battered by heavy losses from U.S. subprime mortgages and other risky debt amid credit turmoil which has roiled world financial markets.

Germany has borne the brunt of the European fallout so far from problems stemming from subprime home loans as two of the country's banks have almost collapsed, requiring high-profile industry bailouts.

"The cabinet unanimously decided to sell the state's share in SachsenLB," Saxony spokesman Andreas Beese told reporters in the state capital Dresden.

"Representatives of the state have been asked to act accordingly in a meeting of Sachsen LB owners tonight. The government assumes the meeting will approve the sale," he said.

State premier Georg Milbradt earlier said SachsenLB had come under so much pressure that it could not continue its activities without a partner.

SachsenLB would be run by LBBW as a subsidiary and LBBW had secured the right to return it to its owners -- Saxony state and local community savings banks -- if more unacceptable risks emerged, Milbradt said.

LBBW owners were due to meet later on Sunday in Stuttgart.

A source close to the company said LBBW was taking over 100 percent of SachsenLB at a price of 300 million euros ($407 million).

Another source close to the negotiations said SachsenLB needed between 250 and 300 million euros immediately, which LBBW would inject in cash.

SachsenLB is the second German casualty after the near collapse of small-company lender IKB (IKBG.DE) which was saved by a group of banks including state-owned KfW KFW.UL.

In return for a 17 billion euro ($23.1 billion) credit line to keep it afloat, the owners were forced into agreeing to its sale, a milestone in Germany, where few state-owned banks are ever put up for auction.

REFORM DEBATE

The events are speeding long-running discussions about how to reform Germany's banking sector, where analysts have long been saying the country could function with fewer institutions and that the state should loosen its dominance of the industry.

North-Rhine Westphalia state premier Juergen Ruettgers favours creating a northern and a southern group of state banks, according to an advance extract of a Focus magazine article.