Next stop, Hypo

Fresh from its failed attempt to acquire UK insurer Friends Provident, the US private equity firm JC Flowers has teamed up with Grove International and Shinsei Bank to buy a 25 percent stake in German bank, Hypo Real Estate.

Buying stakes in European banks is not the preserve of sovereign wealth funds. Private equity firms and private real estate funds are combining to do the same.

Last month, New York-based JC Flowers, private equity real estate firm Grove International and Japan's Shinsei Bank, in which JC Flowers owns a minority share, offered to take a 24.9 percent stake in Hypo Real Estate. It may not be in the same league as The Government of Singapore Investment Corporation helping UBS's balance sheet out with a $9.75 billion (€6.1 billion) investment in return for a nine percent stake, but it is significant nevertheless.

JC Flowers, which has no track record of hostile takeovers, sense an opportunity because shares in Hypo have fallen dramatically since January 15 this year, when the bank surprised shareholders by announcing €390 million of write-downs related to US subprime investments. The group's offer, pitched at €22.50 in cash per share is equivalent to a premium of 25.3 percent on the volume-weighted three month closing price of €17.95 at the time of the offer. Shares were trading at €23.26 at press time, valuing the bank at €4.6 billion.

Hypo is a German commercial real estate lender which recently took over the public finance lender Depfa for €5.7 billion. Apart from receiving criticism over previously unflagged subprime write-downs the management has received little in the way of knocks compared to the large Wall Street banks and indeed, UBS, based in Zurich. It has steadfastly tried to continue underwriting real estate deals in tough lending conditions, even in emerging markets.

Hypo Real Estate has been supportive by working with the group in the run-up to the offer, according to a statement. It said it welcomed the offer “in principle,” calling the group “experienced financial investors.” It also said the bank would “gain a group of financial investors who have understood the business model and the opportunities of the group.”

In addition, the bank hinted at possible collaboration with Shinsei Bank, which may pertain to the public sector and commercial real estate finance business sectors. The management board, chaired by Georg Funke, is set to publish a statement on the offer.

In August 2006, JC Flowers acquired a 26 percent stake in another German bank, HSH Nordbank, from WestLB Bank. This was the first time a public sector bank in Germany brought in private sector shareholders. It did not have the success it wanted recently, however, when in April it dropped a $6.9 billion bid for US insurer Friends Provident, whose board had refused to come to the table. Ravi Sinha, a partner, is leading efforts in Europe. For more on Grove International, see p. 46 of the PERE 30 list of leading private equity real estate firms.