Going once, going twice

As this issue goes to press, Soffin owns more than 47% of real estate lender HRE, which, for the last few months, has just barely survived with more than EUR100bn in state-backed guarantees. According to the will of its now biggest shareholder, HRE will decide on a capital increase on the next general assembly on 2 June to strengthen its equity base and make progress on the direly needed restructuring of the system-critical bank. The new shares will be acquired exclusively by Soffin, which aims at acquiring 90% of HRE. This would enable it to squeeze out the other stakeholders and dilute Flowers' stake in the bank.

A similar situation now also affects HSH Nordbank, another J C Flowers investment, which is likely to decide on a capital increase of EUR3bn. According to press reports, J C Flowers seeks legal action against the decision, fearing a massive dilution of its 25% stake due to the low valuation of the shares to be issued. HSH Nordbank is majority-owned by the counties of Hamburg and Schleswig-Holstein, which might expand their joint stake to as much as 85%.

One of Flowers' arguments against selling its stake in HRE when the takeover offer was issued was that the bank would recover in the mid-term and that the stake therefore would be worth much more. The German government argues that the current share price of HRE values Flowers' stake at a fraction of what the investor paid for it.

The government is at the core of the fair value debate, which in theory is a good concept, but in practice is near impossible. When the going price is distressed, does that then constitute the fair value?

Yours sincerely,

Mareen Goebel

Editor, Deutsche unquote"

Tel: +44 20 7004 7462

mareen.goebel@incisivemedia.com

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