Tuesday, March 29, 2011; Vetiva Research
As the market awaits details on the recapitalization and ultimate buy-outs of the CBN-intervened banks, a final cap which is expected to fully put the banking system back on track, we take a cursory review of the processes.
We expect that significant mileage in the M&A process would have been reached by the end of H1’11 with most of the deals nearing conclusion.
This report is an interim general view of the implications of the M&As on the quoted acquirers, as we look out for details of the terms of the transactions to fully assess the impact on both the targets and acquirers. Overall, we are provisionally upbeat on FIRSTBANK and ACCESS but indifferent to FCMB in respect of their on-going M&A bids.
Early thoughts on targets and acquirers
Wiping off the negative capital; our thoughts: We recall AMCON’s blueprint to recapitalize the target banks to zero equity; a laudable strategy aimed at de-risking them, thus providing further attraction for the bidders. With the expectation of concluding the official Shelf registration of its proposed N3 trillion zero coupon bonds before the end of H1’11, we believe AMCON will issue registered bonds to the CBN-intervened banks as its equity injection with the understanding that these banks will in turn subscribe to the bonds. We think AMCON will also redeem (on behalf of the banks) the N620 billion tier-2 capital provided by CBN in 2009, to alleviate liability burden and minimize excessive public intervention in the ownership/management of the acquiring banks.
AMCON’s holding in targets; a likely tussle between the “bad bank” and Shareholders: Whilst shareholders of rescued banks are often left with nothing, especially in cases where there are no residual claims which can be attributed to equity owners (negative equity), the regulator’s forbearance and commitment to restoring investor confidence has shown that the ownership of the intervened banks will be shared between the shareholders and AMCON. That said, we then ask the question - what is the appropriate sharing formula? We expect the CBN and appointed financial advisers to play crucial roles in establishing a generic framework which may be used in resolving probable contentions.
A quick look at the imminent mergers: We focus on the listed banks with interest in the on-going purchase and assumption agreements. Our rationale for this is to evaluate the likely impact of the deal on near term operations of the banks and sentiments for their shares on the floor of the Exchange. Hence, we zoom in on FirstBank, Access Bank and FCMB, which, based on relatively reliable grapevines, are bidding for Oceanic Bank, Intercontinental Bank and FinBank respectively. We believe the key attractions for the bidders are broadly mixed. Nonetheless, the cheapness of the offer is a common attraction for all acquirers. We are cautious to say that FCMB may have dropped its earlier bid for FinBank given newsflow of Private Equity Group, Vine Capital’s interest in the target.