Thursday, November 24, 2011 9:11 AM
Ecobank Transnational Inc. [ETI] notified the exchange that the operations of Oceanic Bank will be merged with that of Ecobank Nigeria Plc. Much in line with our expectation, find below salient point of the scheme of arrangement;
Ecobank Nigeria Plc will be delisted because ETI’s stake in Ecobank Nigeria will increase from 85% to 93% which will further shrink the bank’s free float below the regulatory requirement.
As a result, ETI is offering Ecobank Nigeria minority shareholders 1 ETI share for every 5.16 Ecobank Nigeria shares previously held.
Current trading in the shares of the two companies is unlikely to produce an arbitrage profit as the exchange ratio appears market based [2.13*5.16=10.99]. By implication, selling ECOBANK produces the approximate cash flow needed to take position in ETI. If transaction costs are factored in, the resulting cash inflow falls short of the required bid for ETI. Only if the current price of ECOBANK adjusts to equate the Price to book ratio of ETI that merger arbitrage opportunities lie.
Based on relative net asset valuation of the shares, Ecobank Nigeria’s shares are relatively underpriced [at 0.39x] compared to ETI’s shares [0.51x]. This transaction is therefore to the advantage of ETI who exchanges an ‘overpriced stock’ for an ‘underpriced stock’. Nonetheless, we are of the opinion that value lies in ETI on the basis of value accretion from both scale and scope economies considering its low price-to-earnings and price-to-book ratios.
This scheme of arrangement is still subject to shareholder and regulatory approval by Securities and Exchange Commission [SEC].