Kent could sign £50m deal with private equity firm tomorrow

The Kent Reliance Building Society is set to sign a £50m deal with the private equity investor JC Flowers to create a new building society consolidation vehicle as soon as tomorrow. The deal will see the creation of a new holding company 51 per cent owned by Kent and 49 per cent owned by JC Flowers.

Sources close to Kent Reliance, which is likely to confirm it is in talks this morning, insisted that the deal was not being struck because it is in trouble. But they said it could allow the building society to double the size of its business within a short space of time and seal at least one deal with a rival society.

The two sides are understood to be working on "an agreed rate of return" for JC Flowers, run by the former Goldman Sachs banker Christopher Flowers. It will likely see the firm seeking an exit within the medium term.

However, JC Flowers has pledged not to seek to take a dividend from the new holding company created by the cash injection. Kent, run by Mike Lazenby, will be the majority shareholder and will have to seek the approval of members before completing a transaction. Kent Reliance is unusual in having outsourced much of its administrative work to India.

It is understood that the operation has the flexibility to take on a significant amount of new business very quickly. Kent is also relatively unusual in transacting much of its business with members over the telephone and internet – it has only a handful of physical branches.

The society, which has grown spectacularly since the acquisition of the Jersey-based mortgage business of Standard Chartered Grindlays Bank, has assets of £2.26bn.

The building society is expected to stress that it will have control of the venture and that the deal will work as a new model that will enable its mutually-owned structure to survive and thrive despite the current economic difficulties.

However, while the Financial Services Authority has been kept fully appraised of the negotiations' progress, the entry of JC Flowers into the mutual sector is still likely to cause controversy.

Flowers's acrimonious pullout from a deal to buy Sallie Mae, the US-backed provider of student loans, upset the authorities and there have been troubles with bank holdings in Germany and Japan.

The company first attracted attention in Britain by trying to buy Northern Rock. It also made an unsuccessful bid for Friends Provident before the life insurer fell to Clive Cowdery's Resolution.