Investors are betting that Indonesia will drive DBS Group Holdings Ltd. (DBS) to abandon Southeast Asia’s largest bank takeover.
Indonesia’s central bank last week gave approval for Singapore-based DBS, which bid $6.8 billion for all of PT Bank Danamon Indonesia, to buy only 40 percent of the company as the regulator pushes for Indonesian banks to have equal access in Singapore. With the agreement expiring in three days, Danamon is trading at a larger discount to its takeover price than any pending deal in Asia larger than $500 million, according to data compiled by Bloomberg.
While a minority stake in Danamon would cut DBS’s reliance on Singapore, which is Southeast Asia’s least lucrative lending market, Indonesian ownership laws can bar the bank from ever gaining full control. The original deal, struck more than a year ago, assumed DBS would buy all of Danamon, and the terms must be changed before a smaller purchase is logical for DBS, said CMC Markets Singapore Pte. The other option is for DBS to scrap the transaction altogether, according to IG Asia Pte.
“At this point, it’s not a good deal for DBS,” Kelly Teoh, a Singapore-based market strategist at IG Asia, said in a phone interview. “A minority stake doesn’t make sense for DBS, without the control to steer the business in the direction they would like. I won’t be surprised if they step away from this.”
DBS said last year that it would pay about 66.4 trillion rupiah ($6.8 billion) to buy Danamon from Singapore’s state-owned investment company, Temasek Holdings Pte, and minority shareholders. Temasek will swap its 67 percent stake in Danamon for shares of DBS, while the other investors will be offered 7,000 rupiah apiece in cash.
The deal was announced before Indonesia, Southeast Asia’s most profitable lending market, revealed new rules that restrict ownership of local banks. Speaking to Parliament last week, Darmin Nasution, who was then Bank Indonesia governor, said DBS is allowed to buy 40 percent of Danamon. The new rules, unveiled last July, allow ownership to rise above the 40 percent threshold if certain conditions are met.
The regulator is also seeking better access to Singapore for Indonesia’s lenders -- something the Monetary Authority of Singapore acknowledged it is exploring in a May 21 statement. In pursuing equal access for Indonesian lenders that want to expand in Singapore, Bank Indonesia hasn’t specified the details of such reciprocity.
“There seems to be much remaining up for discussion in this deal, but with a 40 percent minority stake and the original terms well away from current levels, this no longer seems as attractive a deal for DBS,” Jason Hughes, Singapore-based head of sales trading at CMC Markets, said in an e-mail.
The takeover agreement, already extended once, is now set to expire on June 2. Spokesmen for DBS and Temasek, which is DBS’s largest shareholder, declined to comment on any renegotiation or potential extension.
Danamon will only make further announcements once it receives an official written notification from Bank Indonesia about its ruling, said Zsa Zsa Yusharyahya, a Jakarta-based spokeswoman for Danamon.
The outcome may depend on how successfully DBS can persuade Singapore’s authorities to reach an agreement with Indonesia, an economic rival, said Pitra Narendra, a Jakarta-based senior associate at Vriens & Partners, an advisory firm that specializes in assessing the political risk of investments in the region.
The Monetary Authority of Singapore referred to its May 21 statement when asked to comment. Difi Johansyah, a Jakarta-based spokesman for Bank Indonesia, didn’t respond to requests for comment.
Next year’s Indonesia presidential elections, the latest bank-ownership laws and a new central bank governor who started this month all attach more risk to any investment, Narendra said.
“A party might pick up this issue during the campaign and politicize it,” Narendra said in a phone interview. “If you look at the history between Indonesia and Singapore, there are outstanding contentious issues.”
Danamon shares have dropped 4.2 percent to 5,750 rupiah since Nasution’s May 21 speech, leaving Danamon trading at an 18 percent discount to the value of DBS’s takeover offer. That’s the furthest below the bid of any Asian takeover for more than $500 million, data compiled by Bloomberg show.
Danamon was unchanged in Jakarta trading today, while DBS fell 0.9 percent to S$16.97 in Singapore.
Left only with the option to buy 40 percent of Danamon, DBS may be able to renegotiate the deal at a lower price, perhaps by granting Temasek an option to sell the rest at a higher price later, Kevin Kwek, a Sanford C. Bernstein & Co. analyst in Singapore, wrote in a note yesterday.
“The 40 percent stake in a fast-growing lender would still open significant opportunities for DBS in Indonesia,” Ruta Cereskeviciute, a London-based senior economist at IHS Global Insight, said in an e-mail. “It is less likely that DBS will walk away from the deal altogether.”
In that case, Bernstein’s Kwek expects DBS to pay less than 2 times book value for the stake. At twice the value of its net assets, Danamon’s shares would be worth 6,156 rupiah each, or 12 percent less than DBS’s existing offer.
The lower valuation would fall below the median of 2.16 times currently fetched by 14 Indonesian banks with market values of more than $1 billion, data compiled by Bloomberg show. Japan’s Sumitomo Mitsui Financial Group Inc. (8316) this month agreed to pay 4.57 times book value for 40 percent of PT Bank Tabungan Pensiunan Nasional.
Still, DBS’s intention was never to own a smaller stake, said Ken Ang, a Singapore-based analyst at Phillip Securities Pte. The purchase was a key plank in DBS’s plans to increase earnings from faster growing and more profitable markets in Asia. Last year DBS generated more than 80 percent of its income from Singapore and Hong Kong.
Average lending margins of 7.3 percent at Indonesia’s largest banks are four times fatter than in Singapore and the best among the world’s 20 biggest economies, data compiled by Bloomberg show. With just 40 percent of Danamon and no clarity on whether it will ever gain more, DBS won’t be able to extract the same benefits from the business as it would with total control, Ang said.
“It may not be in DBS’s favor to purchase 40 percent now and wait and see what happens next,” Ang said in a phone interview. “It might be an all-or-nothing issue.”
Another disincentive to DBS owning a minority stake is that new rules would require the bank to deduct the entire value of the investment from Tier 1 capital, funds to protect a bank against potential losses. Compared to the acquisition of the entire bank, the capital requirements under international Basel III guidelines make ownership of 40 percent “sub-optimal,” Krishna Guha, a Singapore-based analyst at Jefferies Group LLC, wrote in an April 23 note to clients.
Without a guarantee of control, the purchase isn’t worth pursuing for DBS, said Wee Siang Ng, a Singapore-based analyst at Moody’s Investors Service.
“They will walk away from the deal,” he said by e-mail. “I also think they should walk away.”