Access Bank Plc and Diamond Bank Plc Merger: A Lofty Deal or Damp Squib?

Access Bank Plc and Diamond Bank Plc Merger: A Lofty Deal or Damp Squib?

Nigerian Banks

A Lofty Deal or a Damp Squib?
• A switch to National Banking License… In our recently published equity commentary on Diamond Bank (See report: Overblown fright or Justified concerns), we had stated three options the bank’s management will adopt to keep the bank operational and meet its obligation to lenders. While we had considered the possible acquisition by a bigger bank, the management of both banks in separate press releases refuted the claim. Consequently, as with one of our options, Diamond Bank got approval from the CBN to operate as a national bank following the sale of its UK business, a development that was perceived to have saved the bank from capitalization needs and continue operations on a better footing.

• …and then a Scheme of Merger. To our surprise, news broke over the weekend of a possible merger between both banks, with the management of Access Bank Plc and Diamond Bank Plc yesterday separately issued releases on the Nigerian Stock Exchange (NSE) stating the planned acquisition of Diamond by Access with a consideration price of N3.13/share. This is on the consideration of N1.00 in cash for one share of Diamond bank held and 2 new shares of Access for every 7 shares of Diamond. Accordingly, we estimate total cash consideration of N23 billion and new allotted shares of 6.6 billion units in Access Bank. We note that the consideration price is 213% above the closing market price of N1.0 per share of Diamond yesterday.

• 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 the 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 tomorrow (Click here for conference detail) 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.

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Access Bank Plc and Diamond Bank Plc Merger – A Lofty Deal or Damp Squib

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My uncle’s children

My uncle’s children

My cousin Gerald has visited again. This time, he is staying for one month to buy all the necessities for his first year at the University. Dad would be funding it as usual. I and my five siblings have gotten used to seeing my dad fund his nephews’ education while my uncle did his best to keep populating the world.

My mum wasn’t against dad helping his nephews, but she kept prodding dad to save some money for his own children’s education as well since we were all still quite young. Dad didn’t understand her. He believed that if he gives the best to his brother’s children, his brother or maybe someone else would do the same for him. In truth, I think he never really envisaged that his business would go under before his own kids were grown – he was so sure of this that he asked mum to resign from her government job as a teacher. Unfortunately, the business stopped doing well and thank God mum didn’t resign.

Growing up, I and my siblings lived a life of managing. Dad became a sad version of himself especially when we asked for money for the basic needs as students. It was almost as though we shouldn’t ‘need’ anything. Back in the University, we weren’t the kids that carried the latest phones, or wore the best clothes or even had the required textbooks. We were the kids that made do and never complained.

Mum soon took over the financial reigns as dad’s business completely crumbled. Seeing her struggles fostered some form of discipline in us all to succeed and make her and dad proud. Did my uncle finally help out financially? I wish. He never even looked our way again.

Somehow, we all scraped and managed till today. Today, I own a multimillion naira apparel business alongside my lucrative consulting role in an Oil and Gas firm while my other siblings are doing good in their careers and businesses.

Every day I remember how we all got here. How mum put in her sweat and blood – and how dad miscalculated with his finances and when we were little.

Yes, we all turned out well, but would we have if mum didn’t make all the sacrifice? What if dad had saved for our education like mum persuaded him to? I know a lot of people will say that the struggle made us better people. That is true only because of the upbringing mum gave us and her kind of woman. I’ve seen families that went through what we did, and it shattered their future.

I’ll be a fool to allow the thunder strike twice in the same place. That is why the moment our twins were born four years ago, I got an education plan for them as well as a trust fund. Life has taught me enough lessons, so I know better than to leave anything to chance.

I still take care of needs from extended family but at least I’m at peace knowing my wife and children will never have to struggle through life like I did.

 

 

 

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