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Yann Le Guernigou
12 Feb 2008 14:08
Société Générale launched a deeply discounted â,¬5,5-billion ($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 â,¬47,50 per share gives its existing shareholders a bigger-than-expected discount of 38,9% to Friday’s price as a reward for sticking with the bank and filling a â,¬4,9-billion hole blamed on one trader.
Investors and analysts, who had predicted a discount of 30% , said Société Générale appeared anxious to guarantee a manoeuvre 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 the bank since January 24 when executive chairperson Daniel Bouton unveiled the multibillion-euro trading losses and pinned the blame on unauthorised 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.
Top contender to bid for Société Générale is domestic rival BNP Paribas, though a source familiar with BNP’s thinking said on Monday it was not preparing a hostile bid. BNP failed to buy Société Générale 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 Société Générale management considers it intelligent to bolster the bank with a natural partner there could be something to do.”
Société Générale 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.
Société Générale shares fell 4% to close at â,¬74,59, with France’s benchmark CAC 40 index down 0,6%.
“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.
The bank 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 US 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.
Société Générale’s cash call is also designed to mop up writedowns from the United States subprime crisis totalling â,¬2,6-billion, including â,¬400-million pencilled in but not previously allocated.
A senior Société Générale 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 the bank’s management.
The discount compares with 15,5% offered by BNP Paribas 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 Société Générale worth â,¬93. The bank declined comment.
Although BNP has said it is examining the Société Générale dossier, sources familiar with the bank, speaking on condition of anonymity, said the presence of double voting rights among some shareholders and a voting cap of 15% 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 Société Générale’s shareholders will eventually find attractive as banks feel rising economic pressures, they said.
Société Générale 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% from 6,8% at the end of 2007.
Based on Friday’s price of â,¬77,72, less a dividend of â,¬0,9 promised to holders of old shares, Société Générale’s offer values its stock at â,¬70,96 and each right at â,¬5,86.
Shareholders can opt to avoid dilution by exchanging the rights attached to four old shares for one new share, and paying â,¬47,5 in cash, or sell the rights on the market.
The offer will run from February 21 to February 29.
JPMorgan, Morgan Stanley and Société Générale’s own investment bank are leading the deal as book runners, and Credit Suisse and Merrill Lynch are co-book runners.
The bank boosted its earlier provisional forecast for 2007 profits, saying it expected net income of â,¬947-million. On January 24 it had forecast net profit of â,¬600-million to â,¬800-million.
It set targets for 2008 and 2010 which are close to current goals, with a return on equity of 19% to 20% against 20% now.
It vowed to stick by its strategy of driving growth through foreign retail banking, specialist financial services and private banking. - Reuters
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