TOKYO General Electric Co (GE.N) will sell its Japanese consumer finance operation to Shinsei Bank Ltd (8303.T) for $5.4 billion, concluding a year-long effort to pull out of consumer lending in Japan.
GE has been looking to shed assets globally amid calls from analysts and investors to simplify its vast operations which range from jet engines to media. Also, changing regulations have eroded profits in Japan's consumer lending sector.
The U.S. company said on Thursday it will look to spin off to shareholders its entire consumer and industrial unit, signaling it wants to part with a large part of its portfolio, not just the $7 billion appliance arm it has been looking to sell.
The deal also marks a significant bet by Japan's Shinsei, which is about one-third owned by U.S. buyout firm J.C. Flowers & Co. The lender is wagering that it can build a profitable consumer lender by leveraging its brand and retail bank operations.
The midsize bank said it will pay 580 billion yen ($5.4 billion) in cash for the Japanese arm of GE Consumer Finance, which includes a moneylender, Lake, as well as a credit card and housing loan operation.
"This marks our largest acquisition to date and is the biggest step we have taken towards our goal of redefining and modernizing consumer finance in Japan," Shinsei President Thierry Porte told a news conference.
The deal is likely to be finalized by the end of September, and will immediately increase earnings per share, Shinsei said in a statement. Chief Financial Officer Rahul Gupta declined to say how much the bank expects the acquisition to boost earnings.
Ratings agency Standard & Poor's put the bank on credit watch with negative implications, meaning that the deal was likely to have a negative impact on the bank's credit quality.
The 580 billion yen price tag amounts to about 80 percent of the bank's Tier 1, or core, capital, while the all-cash purchase will likely increase the bank's debt, the agency said.
Shares of Shinsei ended Friday trade down 3 percent at 358 yen, after Reuters reported the bank was in final talks to buy the business from GE. Tokyo's index of bank stocks .IBNKS.T ended the day flat.
BOOSTING MARKET SHARE
"In order to survive the regulation changes over the next two years the key is to get more market share," said Kristine Li, an analyst at KBC Securities in Tokyo.
"Profitability will never be as good as it used to be, therefore volume is critical."
Consumer lenders have seen their profits slide after Japan's parliament approved a law to lower the maximum interest rate they can charge. The regulations will go into effect by 2009, and moneylenders have already lowered their rates in anticipation.
They have also been forced to repay previous interest that is now deemed illegally high.
The deal will give Shinsei control of 884 billion yen in total loans outstanding, and 2.2 million accounts. Lake alone has an outstanding loan balance of 650 billion yen, making it Japan's sixth-largest consumer finance firm, according to industry group data.
Consumer lenders Acom Co Ltd (8572.T) and Promise Co Ltd 8574.T had also been bidding for Lake, but were outmaneuvered by Shinsei and eventually dropped out, sources familiar with the deal said.
The sources spoke on condition of anonymity.
As part of the deal, Shinsei will be responsible only for repaying up to about 206 billion yen worth of legal claims on overcharged interest, with the rest to be shouldered by GE, Shinsei said in a statement.
While the stricter regulation has pushed many moneylenders into debt and prompted industry consolidation, some Japanese banks see the turmoil as an opportunity to take market share.
Shinsei already owns about two-thirds of both finance firm Aplus Co Ltd 8589.OS and consumer lender Shinki Co Ltd 8568.T.
Shinsei's Porte said the bank was not looking to integrate the units from GE with its existing businesses, but would run them separately.
However, he said the bank expected synergies from bringing its retail banking and consumer finance businesses under one management structure.
Shinsei, which introduced 24-hour banking to a country where retail banking services lag those in many Western countries, believes it can make a similar change to consumer lending.
Shinsei's Porte has repeatedly said the bank will be able to build a "new model" for the industry.
(Editing by Michael Watson/Tony Austin/Rory Channing)