Security Pacific Sells 5% of Subsidiary to Japanese Bank

Security Pacific Corp. said Tuesday that it has agreed to sell 5% of its consumer and commercial finance subsidiary for $100 million to Mitsui Bank Ltd., Japan’s seventh-largest bank.

Along with a healthy boost to capital, the transaction offers Security Pacific access to the Japanese subsidiaries, franchises and distributors in the United States that are associated with Mitsui’s loosely knit industrial group, or zaibatsu.

U.S. banks have found it difficult to do business with many of the hundreds of Japanese companies here because they retain their long-term relationships to banks back home. At the same time, however, Japanese banks have been slow to develop the types of products that the companies need to compete in the United States.

“Because of the zaibatsu relationship that many of these companies have with the Mitsui corporate family, it gives us an access which is, in the parlance of the zaibatsus, a comfortable way of doing business,” said Nicholas B. Binkley, vice chairman of Security Pacific Financial Services System.

As part of Japan’s second-largest general trading group, Mitsui Bank belongs to a giant family of diverse manufacturing and energy companies. In addition, the bank has longstanding relationships with other major Japanese corporations with subsidiaries in the United States.

The deal grew out of talks that started 18 months ago between Kenichi Kamiya, chairman of Mitsui Bank, and Richard J. Flamson III, chairman and chief executive of Los Angeles-based Security Pacific, the United States’ fifth-largest banking company.

Bank officials said the transaction is expected to be completed in the fourth quarter of this year.

The agreement provides Mitsui Bank with a 5% equity interest in the consumer and commercial services group of Security Pacific Financial Services System, which is based in San Diego. The Japanese bank also receives an option to buy another 5% on similar terms.

The Security Pacific subsidiary, which has assets of $12.6 billion, provides non-collateralized consumer loans, such as home equity loans and sales financing for dealers, through 350 offices in 44 states. It also makes commercial loans that finance product sales.

For instance, if an office-machine firm wants to sell 100 copiers to a customer, the Security Pacific unit will finance the transaction.

As part of the agreement, a Mitsui Bank business development officer will be assigned to the Security Pacific group’s San Diego offices, and the U.S. and Japanese bankers will conduct joint business calls on Mitsui customers, Binkley said.

Mitsui will also assist Security Pacific in selling its banking services in Japan and abroad.

Binkley said in an interview that Japanese banks, which are the biggest in the world, want to expand their commercial finance business in the United States but lack the expertise.

“They simply do not have the management or the products, so this is a pretty good way of getting into the business without buying somebody outright and paying a huge premium for it,” Binkley said.

Security Pacific officials were pleased with the $100-million price, which represents 15 times the operating earnings of the consumer and commercial finance business in 1988.

Because the Los Angeles banking company is highly diversified, its executives have long complained that investors undervalue the various components and keep its stock price artificially low.

“This investment is indicative of an appropriate value for the earnings stream of these companies, and gives the market an opportunity to objectively value these businesses,” Flamson said in a statement.