Posted on Wednesday, October 27, 2010
Reuters BreakingViews: Silver Lining in F.D.I.C. Deal
By ROB COX and WEI GU
At first blush, the anticipated initial public offering of BankUnited looks like a deal that could leave Sheila C. Bair, the chairwoman of the Federal Deposit Insurance Corporation, red in the face. After all, she sold the bank, with $13 billion of assets, to a group of private equity heavy-hitters in May 2009 for a song. While it’s not yet clear how much those investors will make, any profit will sound indecent next to the F.D.I.C.’s projected losses on the deal.
But Ms. Bair need not be embarrassed. As one of the first big rescue operations of the banking crisis, the BankUnited deal served to pique investor interest in the banking sector. That arguably helped to reduce overall losses to the insurance fund, whose ultimate backstop is the American taxpayer.
True, it’s not going to look pretty for the F.D.I.C. when BankUnited goes public, which it can do from late next month under the deal it brokered 18 months ago. Investors including Carlyle, Blackstone and Wilbur Ross plugged $900 million of new capital into the bank. That equity is almost certain to be worth a multiple of what they paid.
To entice this crew, the F.D.I.C. had to share losses on $10.7 billion of BankUnited’s assets. The estimated cost to the F.D.I.C. at the time was $4.9 billion, or 46 percent of the assets covered under the loss-sharing agreement. That’s double the loss ratios on deals taking place this year, according to Keefe, Bruyette & Woods.
But that’s sort of the point. To attract capital and foster competition, the F.D.I.C. needed to let one or two prominent deals through the door. BankUnited, and a similar rescue operation for the assets of IndyMac, galvanized the attention of sharp-elbowed private equity barons and got healthy rival banks into the mix.
After the BankUnited deal, the F.D.I.C. changed the rules. It made it harder for private equity to grab assets cheaply. And by forcing them to hold the investments for longer, it reduced potential returns. Moreover, the F.D.I.C. learned to negotiate better for a piece of any upside.
How much BankUnited will make for its investors won’t be clear until its debut. And it will surely look scandalous against the F.D.I.C.’s losses on the deal. But in comparison to the billions the F.D.I.C. may have saved since, it could be a rounding error.
Merger of Exchanges
Magnus Bocker, chief executive of the Singapore Exchange, or SGX, is certainly thinking big. Whether his $8.3 billion bid for ASX, which is based in Sydney and is Australia’s main stock market operator, is good for his own shareholders is another matter. The move has some strategic logic. But the cost savings are small and the 37 percent premium seems too generous.
A Singapore-Australia union makes some sense for both exchanges. Asia lacks a big non-Chinese trading platform. Both countries face outside pressure. Singapore has been losing China-related listings to Hong Kong. Australia struggles to benefit from the Asia boom, as it is culturally and physically remote. Together, they offer investors access to 2,700 companies from 20-plus countries, and the world’s second-largest grouping of resources stocks.
But few synergies can be extracted. The partners aren’t merging their markets, so the combined entity still needs to operate two order books and matching systems. The cost savings will be perhaps only $30 million a year with a net present value of at best $300 million, a tiny fraction of the $2.2 billion premium Singapore is offering.
The deal may still enhance SGX’s earnings. That’s because the exchange, which is in a net cash position, plans to add $3.8 billion in debt to finance the deal.
It’s also exploiting its premium valuation: the Singapore exchange is valued at 28 times 2011 earnings, versus the multiple of 23 times it is offering for its Australian rival, according to Deutsche Bank. But extra leverage will make future earnings more vulnerable; and SGX is diluting some of its growth potential by merging with slower-growing ASX.
Singapore had to offer a premium to get the deal done, not least because it needs ASX to persuade Australian regulators to part with a national treasure.
Nevertheless, this looks like a value-destructive move. Mr. Bocker will be hoping it’s not a big one. ROB COX and WEI GU