As deals go, this one was as unwelcome as they could be for New York private equity firm JC Flowers.
On 2 June, 74 percent of shareholders in Hypo Real Estate voted to back a nationalisation plan.
The agreement led to Germany's bailout programme, the German Financial Markets Stabilisation Fund (SoFFin), owning 90 percent of the bank after it acquired a further 986.5 million shares and gave Hypo extra funds of €2.96 billion. SoFFin, as the only subscriber to the new shares, said it would now initiate a “squeeze out” of minority shareholders.
The Hypo investment has unravelled in cruel fashion for Flowers and its partners, private equity real estate firm Grove International Partner and Japanese bank Shinsei Bank.
Last April, when the Flowers-led consortium revealed its intention to acquire a 29 percent stake, the board of Hypo welcomed it “in principle”. Part of the €1.1 billion investment was made on the expectation that not only could the new investors provide management support to Hypo, but also that there was potential for co-operation with Shinsei, in which JC Flowers has held a minority stake since 2007.
Hypo Real Estate
However, the wheels came off when it became clear last autumn that Hypo needed emergency aid to refinance short-term debt used to acquire subsidiary Depfa bank in 2007. This led to a cataclysmic sequence of events. Billions of euros were pumped into the bank by the German government and financial companies in order to keep it alive, but in the end the German government went even further by pursuing plans to nationalise it.
The nationalisation is politically sensitive because the German state has not “appropriated” property since the Second World War.
The extraordinary meeting held in Munich on 2 June to vote on the issue was extraordinary indeed. The Hypo board, led by chairman Dr. Michael Endres, was subjected to severe barracking from angry shareholders and those entering the meeting were banned from taking in fruit or bottles for fear they would be hurled at Hypo board members.
One upset shareholder, Ulrike Struzek, a 42-year-old housewife from Stuttgart who invested €160,000 in the bank in March 2008 on behalf of her disabled daughter, reportedly told Reuters: “If we aren't allowed to remain shareholders, then what will be left of the money for my daughter in five or 10 years time?”
For his part, JC Flowers founder Christopher Flowers is concerned about what will be left for his investors. His consortium acquired shares at €22.50 last year, a 21.8 percent premium to the share value a few days before the acquisition. By the time PERE went to press, those shares were valued at just €1.64.
A spokesman for Hypo told PERE the “squeeze-out” would apply to everybody holding shares at the time it happens. However, he added that it was not possible to say how many shares were still owned by members of the Flowers consortium due to the dilution following the capital increase. “Any shareholder other than SoFFin is below the reporting threshold,” he said.