PARIS (Reuters) - Societe Generale (SOGN.PA) launched a deeply discounted 5.5 billion euros ($8 billion) capital increase on Monday to prop up its finances and heal scars from the world’s biggest rogue trading scandal.
The one-for-four rights issue at 47.50 euros per share gives its existing shareholders a bigger-than-expected discount of 38.9 percent to Friday’s price as a reward for sticking with the bank and filling a 4.9 billion euro hole blamed on one trader.
Investors and analysts, who had predicted a discount of 30 percent, said SocGen appeared anxious to guarantee a maneuver that could be crucial to its hopes of staying independent.
“The price is very low. The feedback from the market cannot have been very encouraging. As they can’t miss this deal they decided to strike very low,” said Landsbanki Kepler banking analyst Pierre Flabbee.
Takeover talk has swirled around SocGen since January 24 when executive chairman Daniel Bouton unveiled the multibillion-euro trading losses and pinned the blame on unauthorized stock market gambling by one junior trader, 31-year-old Jerome Kerviel.
Kerviel spent the weekend in a Paris prison after prosecutors succeeded in overturning his bail. But a Paris broker who was quizzed by police for 48 hours over his links with Kerviel was released by judges without charge on Saturday.
Top contender to bid for SocGen is domestic rival BNP Paribas (BNPP.PA), though a source familiar with BNP’s thinking told Reuters on Monday it was not preparing a hostile bid. BNP failed to buy SocGen in a three-way takeover battle in 1999.
“The idea of a bid has not been raised at all at board level,” the source said. “What one could think about is a friendly approach. If at a certain stage Societe Generale management considers it intelligent to bolster the bank with a natural partner there could be something to do.”
SocGen shares fell on news of the rights issue, which increases the number of shares in the bank by a quarter, extending losses after the remarks from the source, who asked not to be identified. Although the deal does not dilute existing shareholders who exercise their rights it will dilute earnings.
SocGen shares fell 4.0 percent to close at 74.59 euros, with France's benchmark CAC 40 index .FCHI down 0.6 percent.
“I think this takes away a degree of the speculative premium that had built up. It probably reduces the chances of an imminent takeover. I think the market got carried away that this was going to be a takeover candidate,” Rupert Morrell, senior fund manager at Premier Asset Management, said of the cash call.
SocGen had revealed the size of the capital increase, but not its price, when it disclosed the trading losses.
The bank received a lifeline from two U.S. banks in the shape of guarantees underwriting the offer.
“The price is a big surprise. It’s obviously meant to avoid the underwriting banks getting stuck with shares. In any event it contributed to market weakness this morning,” said David Thebault, head of derivative sales at brokers Global Equities.
SocGen’s cash call is also designed to mop up writedowns from the U.S. sub-prime crisis totaling 2.6 billion euros, including 400 million penciled in but not previously allocated.
A senior SocGen official said the discount was meant to guarantee that the rights issue would be a success against the background of the current volatility in global markets. Rival bankers said the keen price also shored up SocGen’s management.
The discount compares with 15.5 percent offered by BNP Paribas (BNPP.PA) when it raised the same amount of funds to help finance the takeover of Italian bank BNL in March 2006.
French newsletter Lettre de l‘Expansion reported that BNP Paribas’s top management was split over whether to launch an offer for SocGen worth 93 euros. The bank declined comment.
Although BNP has said it is examining the SocGen dossier, sources familiar with the bank, speaking on condition of anonymity, said the presence of double voting rights among some SocGen shareholders and a voting cap of 15 percent on minority rebels made it difficult to go far with a frontal challenge.
BNP has made known it would look at a friendly tie-up, something it believes SocGen shareholders will eventually find attractive as banks feel rising economic pressures, they said.
SocGen says the share issue will boost its main capital adequacy ratio, the amount of cash a bank must hold to back its lending, to 8 percent from 6.8 percent at end-2007.
Based on Friday’s price of 77.72 euros, less a dividend of 0.9 euros promised to holders of old shares, SocGen’s offer values its stock at 70.96 euros and each right at 5.86 euros.
Shareholders can opt to avoid dilution by exchanging the rights attached to four old shares for one new share, and paying 47.5 euros in cash, or sell the rights on the market.
The offer will run from February 21 to February 29.
The bank boosted its earlier provisional forecast for 2007 profits, saying it expected net income of 947 million euros. On January 24 it had forecast net profit of 600 to 800 million euros.
It set targets for 2008-10 which are close to current goals, with a return on equity of 19-20 percent against 20 percent now.
It vowed to stick by its strategy of driving growth through foreign retail banking, specialist financial services and private banking.
Additional reporting by Nick Antonovics, Tim Hepher, Marcel Michelson, Blaise Robinson, Sitamaran Shankar, Nicolas Rialan, Laurence Fletcher, James Regan; Editing by Louise Ireland/Rory Channing