J. Christopher Flowers felt the pain of rejection late in January when Iceland’s Kaupthing Bank withdrew its €3 billion ($4.4 billion) bid for his midmarket Dutch investment bank NIBC. Now the former Goldman-deal-maker-turned-star-private-equity-investor wants to inflict some pain and suffering on NIBC’s local rival ABN Amro.
Flowers tells Institutional Investor, “We can still make good money with NIBC on a stand-alone basis.”
In late August, Kaupthing had announced its intention to purchase NIBC from buyout firm J.C. Flowers & Co. and its NIBC consortium partners, which included Bank of America and British insurer Aviva. That was only a week after the Dutch investment bank saw its first-half earnings plunge 98 percent, to €3 million, on subprime write-downs.
The sale would have made Flowers’s group the biggest shareholders of a much-expanded Kaupthing, with a 15.9 percent stake. Kaupthing’s investment banking services were set to grow from nine countries to 13, while assets would have risen 57 percent, to €75.5 billion. Kaupthing estimated in August that a combination of cross-selling and cheaper funding for the enlarged group would have created revenue and cost synergies at NIBC of €50 million this year, equal to nearly 21 percent of the Dutch bank’s €242 million in aftertax profits from continuing operations in 2007. “We are disappointed that we couldn’t complete the deal, but I don’t think anyone imagined that the market turbulence caused by the subprime crisis would be as severe or as long-lasting as it has proved,” Hreidar Már Sigurdsson, chief executive of Kaupthing, tells II. “In the new environment it would be extremely difficult, if not impossible, to realize either the cost or revenue synergies we were hoping to achieve.”
Flowers does not expect a stand-alone NIBC to boost its profits by €50 million in the currently tough banking market. But he believes that the Hague-based bank can roughly match last year’s profitability by stealing clients from the investment banking operations of ABN Amro, which was purchased for €71 billion in October by Fortis, Royal Bank of Scotland and Banco Santander. Fortis will take over ABN Amro’s retail and commercial banking, asset management and private banking businesses, while RBS will get investment banking and the Asian and North American operations. Santander walks away with the Dutch bank’s Brazilian subsidiary.
The opportunity for NIBC is in the Netherlands, where ABN Amro folded investment banking into retail and commercial banking two years ago. Fortis and RBS must now untangle those two businesses.
“As Fortis and RBS dispute customers, NIBC will have an opportunity to take clients,” says a source close to Flowers. He would like to take NIBC public in two years if the plan works.
As for Kaupthing, it is hunkering down. “Although we had more than a year’s worth of funding on hand for our operations even before canceling the NIBC purchase, we are slowing down the bank’s growth and concentrating on gathering retail deposits in all our markets to minimize dependency on wholesale funding and reassure investors,” says Sigurdsson. “This is likely to be a very tough year.”
