Pe deals of the year

Introduction: Mission accomplished (mostly)   Terra Firma-EMI   3G-Burger King   BankUnited   Kinder Morgan   THL-Warner Music Group   Carlyle-China Pacific   Arcos Dorados   Sequoia-LinkedIn   Sun Capital-Bruegger's   Cerberus-Talecris   Court Square-FiberTech   Second best of the best

Investor uncertainty about where the bottom is for bank loan losses has kept multiples down and bank initial public offerings rare, with only three banks going public since 2008, according to Dealogic. But in January, a consortium of investors assembled by John Kanas, the former CEO of Melville, N.Y.-based North Fork Bancorp., launched a $900 million IPO of BankUnited Financial Corp. less than two years after buying the failed Florida bank in a Federal Deposit Insurance Corp.-assisted deal.

The IPO was not only the largest ever of a U.S. bank, but it resulted in a roughly 130% partly realized return for BankUnited's private equity investors. And BankUnited's stock is still trading at or slightly above the offering price, which was at a premium to the bank's book value.

It is a surprising outcome for a bank that few seemed to want in early 2009, when Kanas' investor consortium, led by Blackstone Group LP, Carlyle Group, WL Ross & Co. LLC and Centerbridge Partners LP, first began to look at BankUnited. Bank regulators had given the undercapitalized bank an April 30 deadline to find a buyer, which was delayed by about three weeks. The FDIC had only received bids from Kanas' group and two others: Toronto's TD Bank Financial Group in partnership with Goldman, Sachs & Co.; and PE firm J.C. Flowers & Co., Kanas says.

Keeping bidders away was BankUnited's severely damaged loan portfolio. "They were mostly doing adjustable-rate mortgages and specializing in ARMs to nonresident Latin American speculators," says Wilbur Ross of New York's WL Ross, adding that nonresident borrowers can pose collection problems. Strategic buyers were too busy tending to their own balance sheet woes to consider acquiring such a troubled bank. And other private equity investors had limited knowledge of how FDIC-assisted deals are structured.

"John [Kanas] and I had both done FDIC deals before in [Resolution Trust Corp.] times, so we understood the process," says Ross.

Kanas first conducted due diligence on BankUnited on Ross' behalf in 2008, after Ross hired him to help identify distressed financial institutions. Kanas says he liked what he saw: a 78-branch network centered around Miami, an area that "we knew would stay beat up and keep the competition busy." Kanas envisioned repairing and repositioning BankUnited to snap up other failed and struggling banks, hiring displaced Florida bankers and grabbing competitors' depositors. What's more, he and Ross were confident Florida's economy would eventually recover. "Because of huge tax burdens [in other states], there will be more and more migration of high-income and high-net-worth people to Florida -- a good market to build deposits," says Ross.

On May 21, 2009, the investors acquired BankUnited and its $12.8 billion in assets and $8.3 billion in nonbrokered deposits from the FDIC, which provided a loss-sharing agreement partly covering about $10.7 billion of the assets. The buyers injected about $945 million in capital. WL Ross, Blackstone and Carlyle took 22% stakes for between $220 million and $240 million each. Centerbridge took a 17.3% interest, for which it paid $172 million, according to a source, and Kanas took a 6.9% stake.

The new owners quickly assembled a mortgage workout team to clean up the loan mess and replaced about 43% of the bank's 1,100 bank staffers, Kanas says. "We had to bring in new lending people, legal staff, human resources, accounting staff and a CFO [Doug Pauls]. There was not really much left of the old bank," Kanas says. Some of the new hires brought stable, core deposit relationships with them to BankUnited.

"When I got there, some 20% of the deposits were core -- now it's about 68%," says Kanas.

They also closed some branches, relocated others and began to steer the bank toward small and midsize business customers, increasing its commercial and industrial loan portfolio, as well as its deposit base. The bank had roughly $560 million in C&I loans as of the end of May, up from about $60 million when it was acquired, Kanas says.

The market was impressed. Miami Lakes, Fla.-based BankUnited first registered for a $300 million IPO in late October 2010. On Jan. 18, when it set a price range of $23 to $25 a share, the bank said it expected the offering to generate about $630 million, more than double what it had initially planned. The IPO launched on Jan. 28 at $27 per share and sold 29 million shares for a total of $783 million. The price was about 1.9 times BankUnited's book value. Banks traded at an average of 85% of book in 2010, according to SNL Financial LC.

"We wanted to be at a premium so we could use the currency for deals, but wanted the price low enough that it would trade at an immediate premium," says Ross. The stock closed at $28.40 on the day of the IPO. It now hovers at around $28.

The IPO's success was due not only to the bank's quick turnaround, but to investors' faith in Kanas and his ability to build a bank through acquisitions. Kanas had joined North Fork in 1971 as a management trainee and by 1976 was president. By 2006, he had presided over 16 acquisitions and had expanded the bank to $60 billion in assets. North Fork was sold to Capital One Financial Corp. in December 2006 for about $15 billion.

BankUnited's lead investors each sold 35% of their holdings in the IPO, with WL Ross, Carlyle and Blackstone unloading 5.7 million shares apiece, Centerbridge selling about 4.5 million and Kanas selling 1.15 million. The 130% partly realized gain exceeded expectations.

"We thought that we could make 20%-plus," says Ross. "This turned out to be a higher rate of return and faster than expected."

Like North Fork before it, BankUnited focuses heavily on small and midsize businesses -- a bank market that Ross says is "underserved in Florida and elsewhere." He adds that BankUnited has "both excess capital, cash and a highly rated public stock to do acquisitions." Its total risk-based capital ratio is about 45%, more than quadruple the well-capitalized threshold.

So BankUnited is keeping an eye out for banks in Florida and New York "with good assets, good locations, management talent, performing C&I loans and core deposits," says Kanas. In early June, BankUnited paid about $72 million for New York's three-branch Herald National Bank, an institution with attractive high-net-worth depositors and business customers, Ross says. Herald has about $407 million in deposits and $500 million in assets.

Meanwhile, BankUnited's stock continues to hold steady because of its expansion potential, says a source familiar with the situation. "It's a growth story -- people think it can grow into the Florida market and outside."