The Wall Street Journal-20080212-Societe Generale Plans Capital Boost

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Societe Generale Plans Capital Boost

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PARIS -- Three weeks after disclosing the world's biggest trading loss, French bank Societe Generale began a heavily discounted 5.5 billion euros ($7.98 billion) capital increase aimed at restoring its credit-worthiness and staying independent.

Bombarded by criticism that it didn't do enough to prevent the scandal, Societe Generale said it would put a brake on the aggressive trading that had become a hallmark of its investment-banking division. During the next six months, the bank will reduce transaction volumes at some of its trading desks and introduce tighter supervision.

But there was more bad news for Societe Generale shareholders. The bank said the total value of its asset write-downs, mainly related to U.S. subprime mortgages, was 2.6 billion euros. Previously, it had announced total write-downs of 2.28 billion euros. The shares fell 4% yesterday.

Asked about the difference in the figures, Societe Generale officials said they had already flagged all of the write-downs but hadn't tallied them.

Executives also confirmed that the bank would have to pay corporate taxes on trading profits booked in 2007 by Jerome Kerviel -- the man Societe Generale blames for its trading problems. Last month, the bank said it had a total loss of 4.91 billion euros as a result of Mr. Kerviel's risky and unauthorized trading.

Despite the new disclosures, analysts said Societe Generale's rights issue might achieve one of its main missions: fending off any hostile bidders.

"The dilutive effect could render a hostile takeover more problematic," CM-CIC analyst Pierre Chedeville said in a research report. The capital increase will add 117 million shares to Societe Generale's existing 467 million.

With Societe Generale's share price hovering near three-year lows, there has been heavy speculation that the bank might become an appetizing takeover target for a number of European banks. Local rival BNP Paribas, which has attempted a merger with Societe Generale before, has said it is considering a bid.

In an effort to persuade existing shareholders to subscribe to the capital increase, Societe Generale said it will give them an opportunity to buy one newly issued share at 47.50 euros for every four shares held. The price for existing shareholders represents a 39% discount to Societe Generale's closing price Friday of 77.72 euros.

Two U.S. banks -- J.P. Morgan Chase & Co. and Morgan Stanley -- have agreed to underwrite the issue. But Jean-Pierre Mustier, head of Societe Generale's investment-banking arm, said the bank had opted for "a reasonable price" on the new shares "to make sure that the operation is fully subscribed."

During the subscription period, between Feb. 21 and Feb. 29, existing Societe Generale shareholders can trade their preferential rights to others. New shareholders will have to buy four preferential rights for each new Societe Generale share they wish to buy.

The bank said it now expects to report net profit fell to 947 million euros in 2007 from 5.22 billion euros in 2006. Executives warned, however, that this figure depends on the outcome of a continued investigation into the trading scandal and may change again.

Societe Generale also confirmed it will have to pay taxes on a 1.47 billion euros profit that Mr. Kerviel had booked on his trading activities by the end of 2007.

Societe Generale said the rights issue will let the bank continue its expansion strategy abroad, notably in fast-developing countries such as Russia.