Sept. 19 (Bloomberg) -- Ashikaga Bank Ltd., taken over by Japan's government three years ago because of mounting bad loans, may get bids from companies including U.S.-based General Electric Co. and Lone Star Funds and Nomura Holdings Inc., people with knowledge of the matter said.

The auction of state-owned Ashikaga, with 150 branches and 4.2 trillion yen ($36 billion) of guaranteed deposits, may attract as many as 20 bidders and sell for as much as 400 billion yen, said the four people, who declined to be identified before the sales process begins. The government said Sept. 1 that it will begin considering offers this year for Ashikaga, based in Tochigi prefecture, 70 miles northeast of Tokyo.

``There are no other big deals available in Japan's private equity market right now,'' said Shinichi Tamura, a Tokyo-based banking analyst at UBS AG. ``These investors specialize in buying distressed assets and revitalizing them.''

Overseas investors are eyeing Japan where a group led by New York-based Ripplewood Holdings LLC has made a gain of at least $3.5 billion since buying Long-Term Credit Bank of Japan Ltd. in 2000. Japan's economy is headed toward its longest postwar expansion as an end to more than seven years of falling prices is encouraging businesses and consumers to spend more.

Local Opposition

Kaoru Yosano, Japan's minister for financial services, met Tochigi Governor Tomikazu Fukuda and the government's advisory panel today in Tokyo to discuss the sale process.

Fukuda today handed Yosano a document including the demand that the government should include local investors in any sale, according to an FSA statement. The paper also demanded that any buyers must sell shares to the public before they try to exit their investment in the bank.

Overseas suitors may face local opposition, said Kazuhiro Itoi, a spokesman at Ashikaga. ``There has been a reaction against foreign investors amid fears they may fire employees, cut loans to ailing companies and seek a quick profit,'' he said.

Ripplewood, led by founder Timothy Collins, was criticized by Japanese lawmakers for prematurely cutting off loans to struggling companies to boost profits at Shinsei Bank Ltd., as the lender was renamed.

The government is selling the bank to recoup public money spent bailing out the country's lenders and Ashikaga has recovered. The bank's core profit was more than 40 billion yen in the past two years and it is forecasting similar earnings for next year. Its bad-loan ratio fell to 7.8 percent as of March 31 compared with 20.62 percent two years earlier.

Job Done

When nationalizing the bank, Japan's Financial Services Agency ordered Ashikaga to set up a three-year business plan from fiscal 2004, with a view to selling the lender after that.

The sale's timing also coincides with the departure of Japan's Prime Minister Junichiro Koizumi, whose successor will be chosen in tomorrow's presidential election by the ruling Liberal Democrat Party.

``It is a symbol of Koizumi's reform of the financial industry and shows the government no longer needs to support the lender,'' said Hisakazu Amano, who helps oversee $16 billion at T&D Asset Management Co. in Tokyo.

Yosano said Sept. 1 that any buyer of Ashikaga must consider ``the community,'' as Ashikaga is a regional bank. Tochigi has a population of about 2 million and the seventh- highest income per person of Japan's 47 prefectures, data compiled by the regional government show.

Ashikaga, formed in 1895, employs about 2,000 people with branches in Tochigi, Gunma, Ibaraki, Fukushima and Saitama prefectures, as well as in Tokyo. Companies including Honda Motor Co., Nissan Motor Co., Kirin Brewery Comp. and Canon Inc. have factories and research centers in Tochigi.

Bad loans at Ashikaga mounted in the early 1990s when Japan's real-estate bubble burst, causing a 70 percent slump in the value of commercial properties. Ashikaga was taken over by the government in November 2003 because of losses.

General Electric

Deposit Insurance Corp. of Japan, which holds the government's shares in Ashikaga, has guaranteed to pay off debt that exceeds assets before handing over the lender to a buyer. Debt exceeded assets by 380 billion yen at the end of March.

GE, the world's second-largest company by market value, last year said it may apply to Japanese regulators for a banking license. Chief Executive Officer Jeffrey Immelt is concentrating on more-profitable finance businesses, such as consumer lending, after exiting the insurance industry.

``We're looking at a wide range of opportunities,'' said Mariko Terao, a GE spokeswoman based in Tokyo. She declined to comment on Ashikaga Bank. Nomura's spokeswoman Aya Tanaka and officials at Lone Star and U.S. buyout firm Texas Pacific Group also declined to comment.

Ashikaga probably is valued at 300 billion yen to 400 billion yen, said UBS' Tamura. The company has about 3.1 trillion yen of loans, the biggest share in Tochigi. It forecast net income of 40.5 billion yen for the year that ends March 31. Bank of Kyoto Ltd., which earned 34.2 billion yen in the latest financial year, has a market value of 415 billion yen.

Lone Star, based in Dallas, would be adding Ashikaga to Tokyo Star Bank Ltd. Lone Star bought Tokyo Star, formerly called Tokyo Sowa Bank Ltd., from the government in 2001. The lender's return on assets at the end of March was 1.2 percent, the highest of any Japanese lender. Tokyo-based Nomura is among the domestic firms that may bid for Ashikaga, the people said.

To contact the reporter on this story: Takahiko Hyuga in Tokyo at thyuga@bloomberg.net.

Last Updated: September 19, 2006 04:49 EDT