On December 9, 2013, Fimbank announced that it had received a joint voluntary bid, from Burgan Bank (BB) and United Gulf Bank (UGB), with the intention of acquiring a controlling stake in the company.
This is the latest step in a multi step process approved by shareholders on the January 31, 2013. BB and UGB currently own 49.78 per cent of Fimbank.
UGB also intends to issue a convertible loan with a principal value of $30m – this is convertible into Fimbank shares at the lower of book value (latest reported 82c per share) or 90c.
The final step will involve a rights issue to raise a minimum of $100m.
BB and UGB both form part of the Kuwaiti Projects Company (Kipco) group. We understand that BB will be taking an active role in Fimbank’s strategic development, whereas UGB will likely be a more passive investor.
BB is based in Kuwait, and is directly owned 41 per cent by KIPCO, and a further 17 per cent by UGB. On June 30, 2013 it had assets of $22.7bn and an equity base of $1.8bn.
Our brief exchanges with management, and high level assessment of the financials lead us to believe that BB is a solid, well run bank – well capitalised, liquid, reasonably diversified, low cost/income ratio, and robust (>100%) provisioning on non-performing loans net of collateral.
It is rated BBB+ by S&P – a major consideration from Fimbank’s perspective.
BB has majority stakes in banks which operate in Algeria, Iraq, Jordan, Tunisia and Turkey. It is quoted on the Kuwait Stock Exchange, with a market capitalisation of around $3.2bn.
UGB is majority owned by Kipco and is rated BBB by Capital Intelligence. It is quoted on the Bahrain Bourse, with a market capitalisation of around $400m.
Kipco describes itself as ‘’one of the largest holding companies in the Middle East and North Africa, with consolidated assets of $26 billion.’’ BB and UGB represent Kipco’s largest and third largest investments.
The main take away points are that the Offerors have:
• a strong presence in the Mena region;
• a particular interest in the finance sector, but no particular expertise in trade finance;
• good investment ratings;
• good general corporate governance principles;
• a healthy attitude towards dividend distribution (see below);
• a long-term investment horizon.
From Fimbank’s corporate perspective, the major advantages are clear and simple enough:
• greater access to funding, and different forms;
• the potential to improve its own credit rating, with the consequent ability to lower its cost of funding further;
• increased credibility when dealing with third parties;
• access to larger deal sizes, with better margins, improved efficiencies;
• access to a larger deal pipeline, with a greater scope for ‘cherry picking’ the most attractive risk/rewards;
• greater diversification;
• retention of independence in day-to-day decision making;
• accelerated rollout of existing strategic plan.
It is often the case that when one company takes over another execution is a major issue and the hoped for synergies are often not achieved
In line with standard corporate governance principles, it is understood that funding will be extended to Fimbank at arm’s length.
However, since Burgan is investment grade, there clearly exists scope to lower Fimbank’s cost of funding even before it obtains an upgrade in its own rating.
It is often the case that when one company takes over another execution is a major issue and the hoped for synergies are often not achieved. However, in this case Fimbank would represent a simple bolt-on acquisition, with no overlap with existing operations and no major revision to the operation. This gives a higher level of conviction that the projected strategic benefits will actually transpire.
Of particular note, in the context of geographic expansion, is the fact that a stronger balance sheet will allow the strategic option of purchasing and expanding existing operations via effective control – in contrast to the current norm of starting greenfield operations from a minority position.
We are of the view that the takeover would be a major net positive for Fimbank, from a corporate perspective.
From a shareholder’s perspective, the major negative is that any benefits which will accrue will have to be enjoyed from a minority position. Furthermore, one may be willing to accept being in a minority of (say) 40 per cent – but not 20 per cent, more so if a de-listing ensues.
The way in which the multistep deal is structured gives rise to the latter position possibly transpiring, in theory. We initially viewed this as a major negative. However, discussions with Fimbank management lead us to a high conviction that the Offerors’ aspirations include retaining the local listing.
In any case, it is also unlikely that existing major holders are inclined to accept the offer.
Our working assumption is that the offerors would be comfortable with an eventual aggregate holding of around 65 per cent. This assumption is important in the context of our recommendation for investors with a long term investment horizon.
These are exciting times for Fimbank. The bank has always had the structural challenge of trying to gain greater access to funding – and better pricing of that funding. This would have allowed it to gain access to a larger pipeline of dealflow, with the potential for better risk/rewards and higher margins.
The takeover would finally give Fimbank the opportunity to realise its potential. The corporate objective is to roughly double return on equity to around 15 per cent by 2015. While it is still early at this stage to fully discount that possibility, there is no doubt that the inherent scope for boosting returns substantially is there. On that basis it is plausible that long-term holders will be rewarded in due course.
This article is the objective and independent opinion of the author. The information contained in the article is based on public information.
Curmi and Partners Ltd is a member of the Malta Stock Exchange, and is licensed by the MFSA to conduct investment services business.
Martin Webster is head of equity research at Curmi and Partners Ltd.