Shinsei battle puts Japanese government in formidable dilemma

Shinsei Bank Ltd updates

Over the past few decades, Shinsei Bank and its doomed former incarnation Long Term Credit Bank have made a habit of putting the Japanese government in tricky positions.

In the latest caper, Shinsei has been targeted in a $1.1bn hostile stakebuilding exercise by the financial conglomerate SBI and responded by proposing a “poison pill” defence. This creates a formidable political dilemma even by Shinsei’s mischief-making standards. 

Where normally the government might try to influence such matters from the sidelines if it felt strongly enough, two state-backed entities (the Deposit Insurance Corporation and the Resolution and Collection Corporation) together hold 21.8 per cent of Shinsei as a legacy of its troubled past. 

The state has consequently ended up with the biggest swing vote at Shinsei’s extraordinary general meeting in October where investors will decide on the poison pill proposal. This would issue warrants to buy shares to existing shareholders to dilute the voting power of the hostile bidder or force it to withdraw its offer altogether.

The government is now under pressure to publicly show its stance on the desirability of unsolicited deals and on whether SBI’s move, however aggressive, is value-creating. 

The implications of this fight, say investors, clearly go further than a single drama around Shinsei. The government is currently marooned between prime ministers (one abruptly outgoing, one still to be decided by a vote next week) with potentially very different views on free market capitalism. But it is in effect being forced to indicate whether Abenomics and the last eight years of pro-shareholder reform have actually meant very much.

The outcome of the tussle itself is important for the banking sector; its greater impact will be on the perception the whole affair leaves of a Japanese market struggling to hold foreigners’ attention.

The history here is critical. Shinsei’s story remains one of the most enthralling corporate dramas of Japan’s post-bubble era. In 1998, the government was forced to nationalise the debt-ridden Long Term Credit Bank out of desperate need to head off a wider banking crisis.

Two years later, it was bought in a taboo-scything swoop by Ripplewood and JC Flowers that marked the first time a Japanese bank came under foreign control.

© REUTERS

Japan would swiftly learn who tends to win in private equity deals. In the years that followed, the new owners aggressively exploited a clause that let them offload the worst of the bank’s bad debts at the state’s expense, paving the way for Shinsei’s 2004 IPO that served Ripplewood and its cohort with a $1bn profit. 

Since that heyday, the glitter around Shinsei has largely disappeared and its shares trade below a quarter of their peak value in 2006. Its problems arise from the same systemic deadweights that drag on the Japanese banking sector — ageing demographics and low interest rates.

Those trends are most evident in the country’s 80-odd regional banks where business is becoming progressively more terrible. Sensing rising systemic risk, the government has long pushed unsuccessfully for defensive sector consolidation.

This is the scene on which Yoshitaka Kitao, the ebullient chief executive of SBI — a financial group best known for its hugely successful online brokerage — has decided to make his mark.

Over the past few years, Kitao has built minority stakes in a number of dismal regional banks, claiming the exercise as part of a grander plan to turn SBI into Japan’s “fourth megabank”. This has put a once famous iconoclast very much in government good books.

Kitao’s unsolicited move involves an offer with a thick premium that would raise SBI’s current stake in Shinsei from 20 to 48 per cent. SBI says it plans to obtain a court injunction against poison pill.

If SBI fails to receive that injunction, the government’s date with destiny is set some time in late October at the Shinsei EGM to approve the poison pill. If the government vehicles vote for the poison pill, the message will be reassuring to much of corporate Japan, but blood-freezing for investors.

If they vote against it, they will appear to be rewarding Kitao’s aggression, but tacitly approving his consolidation and preserving the Abenomics narrative of greater government support for shareholders. Their abstention may be the most likely outcome, but it is also the one guaranteed to infuriate the largest number of people.

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