First Interstate rises upon KKR's stock purchase.

First Interstate rises upon KKR's stock purchase

First Interstate Bancorp common stock hit a new low last week as the bank holding company completed a public offering of 7.5 million shares. But the stock bounced back by $2 on Wednesday from a low of $32.88 per share to close at $34.88.

The purchase of 3.38 million of the shares by a partnership affiliated with Kohlberg Kravis Roberts & Co. (KKR), the New York-based merchant banking firm, probably helped to prop up the price, said Michael Starr, an analyst with Duff & Phelps, a Chicago-based financial research firm.

Starr expressed doubts whether a higher stock price for the company could be sustained. "I suspect the company still has further provisioning of bad loans in Arizona and Texas to do and will have pressure on its capital for some time to come," he said.

Added James P. Hanbury, an analyst at New York-based Wertheim Schroder, "The company had to put more capital into Arizona than they had originally disclosed in the registration statement.

"Although the company is temporarily out of the woods now that the offering is over, the company will now have to earn money and make no further provisions on problem loans for the stock price to strengthen," Hanbury said.

The SEC is currently investigating First Interstate's $300 million provision for bad Texas loans announced in December. The informal inquiry is looking into whether First Interstate disclosed the problem loans on a timely basis.

Neither Starr nor Hanbury consider the SEC probe a serious problem for the company. "I can't recall any instance when the SEC has brought suit against a bank for that type of investigation, especially when there was no pressure from the bank regulators," Starr said. He indicated the SEC generally defers to the expertise of bank regulators. The SEC looked into a prior provision taken by First Interstate last year, although nothing came of it, Starr added.

Hanbury said, "I don't think management knew any more than anyone else before they took the provision, but it is not a good thing for the bank to admit that."

The KKR partnership paid $33 per share. The purchase brings its stake in First Interstate stock up to 9.98 percent from 4.6 percent. It may also purchase up to an additional 112,275 shares if the underwriters exercise their rights under an overallotment option.

Lead underwriters for the stock offering in the U.S. were Goldman, Sachs & Co., Montgomery Securities, Morgan Stanley & Co. and Salomon Bros. Inc. The offering was structured as a dual syndication with 6 million shares offered in the U.S. and 1.5 million shares offered abroad concurrently.

Hanbury indicated there were probably a lot of short sellers of the stock. Short sellers profit when the price of the stock goes down. They sell shares of borrowed shares of the stock, which they at some later date have to replace with other shares.