Aug. 15 (Bloomberg) -- Kaupthing Bank hf, Iceland's biggest bank, agreed to buy NIBC Holding NV for 3 billion euros ($4 billion), less than a week after the Dutch investment bank disclosed losses on U.S. subprime-mortgage bets.

NIBC's owners, a group led by J.C. Flowers & Co., will acquire the subprime holdings for $528 million, NIBC Chief Executive Officer Michael Enthoven said today. The Hague-based NIBC said Aug. 9 it lost at least 137 million euros on the asset- backed securities and said today it expects no further losses.

NIBC, which canceled an initial public offering in March and pulled a bond sale last month, joined banks including Bear Stearns Cos. and Germany's IKB Deutsche Industriebank AG in reporting credit-market losses after late payments on loans to U.S. borrowers with poor credit histories rose to the highest since 2002. Reykjavik-based Kaupthing has spent at least $6.5 billion on acquisitions in the past five years.

``One needs to be a bit more skeptical'' because the purchase is outside Kaupthing's regional base, said Joost de Graaf, who helps manage about $1.1 billion at Kempen Capital Management in Amsterdam and doesn't own Kaupthing shares. NIBC's owners, who agreed to buy it for 2.1 billion euros in August 2005, ``have made a nice return, despite the subprime losses.''

Kaupthing CEO Hreidar Mar Sigurdsson said on a conference call that ``revenue synergies'' make job cuts unlikely at NIBC, which has 718 full-time employees and offices in The Hague, London, Brussels, Frankfurt, New York and Singapore. Enthoven will run Kaupthing in the Netherlands, Belgium and Luxembourg. The companies aim to complete the deal by the end of the year.

Cash, Stock Deal

Kaupthing said in a separate statement it will pay 1.63 billion euros in cash, financed from reserves and new securities including 40 million new shares issued in a rights offer. It will also pay 1.36 billion euros by issuing 110 million new shares valued at 115.375 Swedish kronor ($16.65) to the sellers, making them the second-largest shareholder in Kaupthing. Flowers's group may sell some of the shares after a year and all after two years.

Sigurdsson said some of Kaupthing's biggest shareholders have already agreed to help in financing the transaction.

Kaupthing fell 0.2 percent to 1,099 kronur ($16.41) in Rejkavik trading. Credit-default swaps tied to the bonds climbed 26 basis points to 109 basis points, according to Deutsche Bank AG. A basis point on a credit-default swap contract protecting 10 million euros of debt is equivalent to 1,000 euros.

Subprime Holdings

NIBC cited market volatility as the reason for canceling both the IPO and the bond sale. The IPO would have been valued at about 1.5 billion euros, people with knowledge of the sale said.

Shareholders of NIBC also include ABN Amro Holding NV, target of the biggest banking takeover, Banco Santander SA from Spain and all the company's employees, Enthoven said. He declined to say how big J.C. Flowers's stake is. The group's purchase of NIBC's subprime-related holdings will be financed by a $292 million dividend and $236 million of loans provided by Kaupthing.

NIBC said last week only part of its U.S. asset-backed security investments are subprime-related. It had 391 million euros of investments related to U.S. subprime as of June 30, almost three-quarters of which are AAA rated. About two-thirds of the non-recurring loss in the first half relates to subprime investments, it said.

The bank said on May 25 it plans to wind down its U.S. ABS investments ``over time'' and will focus on asset management for third parties. Kaupthing approached NIBC early June, Sigurdsson said. The approach ``had nothing to do with the subprime issue,'' he said. ``We have been following NIBC for quite some time.''

Ratings Cut

On Aug. 9, Moody's Investors Service cut its rating on the debt of NIBC Bank NV, the main operating company of NIBC Holding, by one level to Baa1, the eighth-highest of 10 possible investment-grade ratings. Fitch Ratings said it revised NIBC Bank's outlook for its long-term issuer default rating to negative from stable. Standard & Poor's put NIBC Bank's A-long- term counterparty-credit rating on so-called credit watch ``with negative implications'' and said today it maintains that view.

Kaupthing's profit jumped more than 50-fold from 2000 to 2005 after it borrowed money abroad to expand outside Iceland's $16 billion economy. The bank bought the U.K.'s Singer & Friedlander in 2005 and Denmark's FIH Erhvervsbank A/S a year earlier and now operates in all the Nordic countries, the U.K., the U.S., Luxembourg and Switzerland.

Kaupthing will grow faster than its competitors this year, both through internal gains and possibly by acquisitions, Sigurdsson said last month. The bank has 3.5 billion euros available for purchases, almost half of that in cash. It is looking for smaller ``bolt-on-acquisitions'' in the Nordic region, CEO Sigurdsson said then.

`Similar Business Models'

``Kaupthing and NIBC have similar business models targeted at providing the full range of financial solutions to small and medium sized enterprises and affluent individuals, and the two businesses are complementary in terms of strategy and geographic spread,'' Sigurdsson said in today's statement.

The Icelandic lender, which has ``some'' U.S. subprime mortgage holdings, said they are ``not material.'' Sigurdsson declined to give details.

Lehman Brothers Holdings Inc. advised Kaupthing.

Icelandic banks are expanding outside their country of 300,000 people to diversify their revenue sources and broaden their client base. Glitnir Bank hf bought Swedish brokerage Fischer Partners last year and Finland's FIM Group Oyj this year. Landsbanki Islands hf is purchasing U.K. investment bank Bridgewell Group Ltd. after buying Ireland's Merrion Capital Group and the U.K.'s Teather & Greenwood in 2005.

To contact the reporter on this story: Martijn van der Starre in Amsterdam vanderstarre@bloomberg.net; Niklas Magnusson in Stockholm at nmagnusson1@bloomberg.net.

Last Updated: August 15, 2007 12:30 EDT