Thursday, October 24, 2014 10.32 AM / Research
The buzz on Customs Street now is about the conundrum Skye Bank Plc’s successful bid represents. Investigations now debunk some long-held assumptions about what a successful bid represents and how PLC’s seeking to make such regulated entities should conduct business. Much more importantly are the unanswered questions from a governance and regulatory standpoint.
This article therefore seeks to aggregate the concerns of the market and contextualizes the development for necessary guidance.
Afribank Plc was liquidated by the Central Bank of Nigeria, had its name changed to Mainstreet Bank Limited, and subsequently under the management of the Asset Management Company of Nigeria (AMCON) who offered the entity for sale through an open bid process.
According to sources close to the bid process, a valuation for Mainstreet Bank yielded a Net Book Value of N79billion as at June 2014 (RE: Management Accounts) and N75billion (RE: 2013 Audited Accounts).
After passing through a well contested bidding process, Skye Bank Plc emerged/was announced as the preferred bidder (approx. N126bn), with Cedar One Investment Partners Limited (approx. N100bn) as the first reserve bidder) Fidelity Bank Plc (approx. N89bn) as the second reserve bidder.
Further to the formal announcement of the bid winners and the signing of agreements, Skye Bank Plc is reported to have paid the mandatory deposit of 20 per cent for the acquisition of Mainstreet Bank. The balance 80 per cent to conclude the transaction is now due for payment on November 03, 2014 as reportedly contained in the signed Share Sale and Purchase Agreement (“SPA”).
If Skye Bank Plc is unable to raise the balance within the rules of the market and CBN guided financial market, the 1st preferred bidder and Fidelity Bank Plc becomes an option.
In the case of CEDAR, we understand that this is a consortium led by a financial advisory firm with notable partners/Plc in tow. For Fidelity, their Tier 1 capital is N163billion and using existing Capital Adequacy Ratio of 10% for national banks, it has up to N100billion available from its capital to acquire Mainstreet Bank. This is above its bid price of N89billion.
If we assume that it cannot use more than 50% of its Tier 1 capital for this purpose the available amount becomes N81.7billion however the bank has up to N53b room in Tier 2 capital to provide the needed coverage.
This simple analysis about the second preferred bidder further makes the concern about Skye Bank Plc more pronounced.
The New Acquisition Maths
Time to check a few assumptions at the door:
1. The serious funding hurdles facing Skye Bank Plc to make full payment of the bid price;
2. An “Equity Raise” has not been approved by the Skye Bank Plc shareholders and as a PLC they can't/should not proceed without an EGM being held;
3. Using an SPV (as done by Heritage which is not a PLC) is not in line with their bid and should not be allowed as it is against the SEC rules and unfair to other bidders (amounts to a change of the rules after bid closure), distorts the bid review and also places its existing shareholders at a disadvantage.
Regulatory Environment vis-à-vis Skye Bank’s Bid for Mainstreet Bank Ltd
In November 2013, the Central Bank of Nigeria (CBN) sent out a draft circular designating eight (8) commercial banks as being Systematically Important Banks (SIBs). The banks were assessed on the following four criteria:
• Size, as defined by total assets;
• Interconnectedness, as defined by interbank exposures and volumes of other intra-industry assets and liabilities;
• Substitutability, as defined by ease with which the institution can be replaced as a financial services provider;
• Complexity, as defined by how difficult it would be to liquidate the institution.
Skye Bank is classified as one of the Significantly Important Bank (SIB).
The banking industry’s stipulated minimum CAR is 10% for local banks, 15% for international banks and 16% for systemically important banks (SIBs). In effect Skye Bank’s minimum CAR as indicated below is in order before the deal.
The Contentious Deal
Following the declaration of Skye Bank as the Preferred Bidder for Mainstreet Bank Limited by AMCON and the payment of 20% of the bid price of N126billion being N25billion on the 10th of October, the Bank is now saddled with an obligation to raise and make payment of the balance of N101billion by the 3rd of November 2014.
While Skye Bank Plc represents that it had paid the mandatory deposit of 20 per cent for the acquisition of Mainstreet Bank, the evidence about its financial condition as the preferred bidder for the acquisition of Mainstreet Bank Limited raises questions that publicly available information has not been able to answer (with necessary caveats).
The disclosed deal price appears to be larger than Skye Bank’s half year 2014 (1H14) equity base – see figure 1 below.
Table 1. Capital Adequacy Ratio
Available Funding Options for the Acquisition
· Debt capital raise (Tier II Capital)
· Equity capital raise (Tier I Capital)
Implication of the Acquisition on Skye Bank Plc’s Financial Position
· Skye Bank has a maximum headroom of c.N26bn of its Tier 1 Capital to fund the acquisition based on its financial position as at 31st December 2013. Going by this position the Bank can maintain the minimum CAR of 15%. However, it is pertinent to note that the financing available from the Bank’s Tier I Capital will only fund 20% of the consideration for the acquisition leaving the bank with the option to raise additional equity capital or debt funding for the acquisition.
· Skye Bank Plc can explore the option of financing the acquisition with debt - however there exists a regulatory constraint.
· The Bank as at December 2013 had in its books Tier II Capital of N16bn and raised additional USD150m (N24bn) in May 2014 amounting to c.N40bn. In line with the regulatory requirement that caps Tier II Capital at a maximum of 33% of Tier I Capital, the bank is unable to explore this option as its Tier I Capital as at December 2013 was N119bn.
· Skye Bank Plc also has an option to raise additional equity capital through a Special Private Placement or Public Offering of its shares. However the following are constraints to this option:
o Time Constraint: Typical public offering of shares will require a minimum of three (3) months to process especially due to the need to secure regulatory approvals from the Central Bank of Nigeria (CBN), The Securities & Exchange Commission (SEC) and The Nigerian Stock Exchange (NSE).
o Dilution of the shareholding of existing shareholders: Should the bank decide to go through the route of an issuance of equity via a special private placement, the shareholding of existing shareholders will be heavily diluted as the bank will need to raise N100bn for the acquisition whilst the current market capitalization of the Bank’s shares is N36bn.
From the foregoing, Skye Bank Plc may not in a position to raise the sum of N126billion to fund the acquisition of Mainstreet Bank from its Balance Sheet, issuing a debt instrument or raising additional equity.
What will be a credible defence/way out by/for Skye Bank Plc? - Not any viable option from the analysis above, BUT if they say they are looking at an outside equity funding or what the rumour mill calls an OFF BALANCE SHEET TRANSACTION, it will substantially dilute the current shareholders, which in the main, has not been approved by their shareholders and regulators.
If they however opt for a debt option – this will be outside the banks’ current Tier 2 Capacity.
What options are there for AMCON, SEC and the CBN under the scenario? – The combined regulators have to ensure that the integrity of the process is respected and that Skye Bank Plc complies with regulations in trying to conclude the deal. If all fails, they can revert to the reserve bidders and subject them to the same level of scrutiny. If this fails, they now have a proper template for engaging future bidders on such a regulatory bound acquisition.