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Hypo's Biggest Loser

Market Scan
Real Trouble At Hypo
Javier Espinoza, 04.09.09, 07:37 AM EDT
The German state has launched a takeover bid for troubled lender Hypo Real State.

"Troubled investment bank Hypo Real Estate was set to become the first nationalized bank in Germany since World War Two after the German government said on Thursday it had launched a takeover bid offer of 1.39 euros ($1.84) per share for 100.0% of the company, a 15.8% premium over the bank’s closing share price on Wednesday.

Shares of Hypo Real Estate ( HREHY - news - people ) rose 15.0%, or 18 euro cents (24 cents), to 1.38 euros ($1.82) in morning trading in Frankfurt.

“I am surprised that the government has offered 1.39 when it was expected to offer between 1.20 to 1.30 euros per share,” said Dirk Becker, an analyst with Kepler Capital Markets. “But [the takeover by the government] has been expected to happen for months.”

With its 100 billion euro ($132 billion) funding gap getting bigger and bigger, Hypo Real Estate was seen as too big to fail. Berlin has said it wants to take full control of the investment bank and restructure it. So far, the bank has received a total of 102 billion euros ($135.5 billion) in guarantees from the state and fellow banks but its financial condition remains uncertain.

Despite harsh opposition against nationalizing the bank, the government passed a special new law that makes this possible and could potentially expropriate Hypo shareholders if they refuse to sell their stake by June 30. It is still unclear whether U.S. private equity investor J.C. Flowers, which owns nearly a quarter of Hypo’s shares, will refuse to sell.

A spokesman for Flowers said the U.S. investor, who bought the stake last June for 22.50 euros ($29.81) per share, would study the offer and reiterated that the firm's preference was to remain a shareholder in the bank.

Angela Merkel’s government took an initial 8.7% stake in the bank in March, paying 3 euros per share ($3.9) in a capital increase, on the same day Real State Hypo posted pretax loss of 5.38 billion euros ($7.1 billion) for 2008 and said it expected to stay in the red for at least two more years.

Berlin passed the expropriation law after failing to agree a selling price with Flowers. But the idea of expropriation is highly controversial in the country because it brings back the memories of such moves by the Nazis in the 1930s and by the communists in East Germany in the postwar era.

But analysts said drastic measures were required to prevent the banking system from collapsing. “All governments would do whatever it takes to prevent the financial system from melting down,” said Kepler's Beckler.

Hypo Real Estate is not the first high-profile bank to fall victim of the global economic crisis. Last year, the Austrian government bought 99.8% of Kommunalkredit for a nominal sum and injected capital. Last September the governments of Belgium, France, Luxembourg and the Netherlands pledged 6.4 billion euros ($8.5 billion) to bail out Dexia."