December 19,, 2018 07.34AM / From works from FT, ARM, Proshare
A conference call to discuss the Access Bank – Diamond Bank Merger will be held today at 16:00hrs Lagos (10:00hrs New York, 15:00hrs London, 17:00hrs Johannesburg). The call will be open to the public – See further details at the end of the article.
Find below the takeaways from post announcement commentaries; further to the thoughts we shared yesterday - Initial Thoughts on Potential Merger To Create Nigeria’s Largest Bank
Highlights - FT
Source / Credit: Access Bank to buy rival Diamond to create Nigeria’s largest lender - FT
A Lofty Deal or a Damp squib? – Selected view from ARM Research
Estimating The Transaction Multiples
As at 9M 2018, Diamond bank’s book value stood at N217.1 billion with a book value per share (BVPS) of N9.37, we estimate a transaction price to book multiple (P/B) of 0.3x compared with the market valuation of 0.1x P/B.
Given our thought that the transaction is strictly equity based, we assume a situation wherein the un-provisioned part of the non-performing loan is adjusted for through equity to leave the books with performing assets.
As such, based on current NPL of N99 billion and total credit charge loss of N54 billion, we estimate an equity charge of N45 billion by Diamond bank over Q4 18 to leave the book value at N172.1 billion and BVPS of N7.4 with implied transaction price to book multiple of 0.4x.
How they Stack up Post-Consolidation
The notice by Access indicated that the bank will issue additional shares of 6.6 billion shares to accommodate the shareholders of Diamond bank. Assessing the impact on current outstanding shares of Access bank of 28.9 billion, we estimate increase in total shares post consolidation to 35.5 billion. Accordingly, we estimate that the potential dilution from the merger of 19%. Furthermore, post-merger, Carlyle Group, Kunoch Holdings and Diamond Partners will own
3.3%, 1.7% and 1.1% of the enlarge Access bank respectively.
Expected Moderation in Cost of Funds
During our engagement with management of Access Bank in November, they guided to the bank’s plan to gradually close out on expensive borrowings.
Specifically, the CFO stated that the bank could refinance its expensive Eurobonds if presented with the opportunity and any other available opportunity that could result in a significant moderation in its funding costs.
Notably, as at 9M 18, Access cost of funds stood at 5.6% compared to Tier 1 average of 4.0%, following contraction in cheaper deposit (current and savings account) mix by 195bps to 45% which resulted in 18.5% YoY jumps in interest on customers deposits, 1.0x YoY growth in interbank placements, and 73.8% YoY increase in borrowing cost.
However, Diamond cost of funds remains the lowest among peers at 4% (coverage Tier 2 average of 5.4%) despite a 260bps YoY contraction in CASA composition to 78.3% over 9M 18.
Accordingly, we see some benefit to Access in terms of moderation in funding cost from the acquisition of Diamond and estimate that Access’s cost of funds could moderate to ~5.1% with a CASA mix of ~55.3% post consolidation.
However, given the reaction to the bank in recent months, we are cautious on the level of cheaper deposits composition being inherited by Access bank. For context, over the last five quarters, Diamond bank has lost CASA deposits of N247.6 billion, reflecting a 22.8% decline YoY to N836.7 billion in Q3 18 from N1.1 trillion in Q3 17. Also, given the lower credit rating of Diamond bank, in terms of corporate deposits, we do not rule out the possibility of erosion in Access bank’s credit rating.
What’s the immediate Impact?
In summary, while this acquisition appears positive for shareholders of Diamond Bank, we are of the view that the transaction will be undesirable for Access Bank in the near term, giving bottlenecks in terms of collapsing of structures as well as dilution impact on profitability metrics.
That said, we await meeting with Management of Access Bank for further details and discussion on this acquisition and would communicate our views in due course.
Any benefit for the core investors in Diamond?
Following the exit of Actis in August 2014 and the need for recapitalization of the bank in November 2014 via a rights issue, Carlyle Group, became the largest single shareholder in Diamond with transaction valued at $147 million (N7.38 per share).
Accordingly, we estimate that on current price of N1.07, the Group is taking a bad hit on the investment to the tune of N20 billion. Accordingly, we believe that the consideration price of N3.13 could reduce Carlyle loss in the venture to ~ N11.4 billion in the short term. However, post consolidation and integration of the shareholders into the enlarged Access bank, we believe the change in the fortune of Carlyle in the venture will be determined by the gains from the integration.
Source / Credit: Access Bank Plc and Diamond Bank Plc Merger: A Lofty Deal or a Damp squib? - ARM Research. Contact Oluwasegun Akinwale via Oluwasegun.firstname.lastname@example.org
Access Bank Conference Call Holds Today
A conference call to discuss the Access Bank – Diamond Bank Merger will be held today at 16:00hrs Lagos (10:00hrs New York, 15:00hrs London, 17:00hrs Johannesburg).
The call will be open to the public. Members of the public who public who would like to join the conference call should click on the Registration link to pre-register for the call and receive dial-in information.
The conference call will also be accessible as an audio webcast through the Investor Relations section of Access Bank Plc’s website
· Visit Access Bank Plc IR Page in Proshare MARKETS
· Visit Diamond Bank Plc IR Page in Proshare MARKETS