China Merchants Bank has triumphed in the three-month battle for Hong Kong-listed Wing Lung Bank and has agreed to buy the 53% controlling stake that is held by the Wu family at a price that puts the lender's equity valuation at about $4.7 billion. The deal will trigger a general offer for the rest of the bank.
CMB, which is widely regarded as China's most profitable commercial bank, will pay the equivalent of 3.1 times Wing Lung's book value at the end of March and 2.9 times its value at the end of 2007, according to sources. The deal was signed on Friday, but isn't expected to be announced until today, which means the level of information was still scarce over the weekend. The achieved valuation is above that of several other bank acquisitions in the region in recent years, but below the price Singapore lender DBS Bank paid for Dao Heng Bank in 2001. At 3.3 times book, the latter is the most expensive acquisition of a Hong Kong bank.
CMB beat larger mainland rival Industrial and Commercial Bank of China (ICBC) and Australia's ANZ Bank to the deal even though it wasn't among the three banks that were initially short-listed. That list also included Bank of Communications, which dropped out in mid-May amid rumours that Beijing had sent a message to the state-owned banks to cap their bid price to avoid the risk of pushing one another to overpay. ICBC and Bocom are both majority-owned by the Ministry of Finance. CMB has links to the government, but is considered a privately owned bank.
Advised by JPMorgan, CMB managed to be brought back into the process and in the end is believed to have won because it tabled the highest bid. However, one source says the buyer has also made it clear that it will keep all of Wing Lung's employees for the time being.
CMB has a lot to gain from getting a foothold in Hong Kong, as it is the only one among the five Hong Kong-listed Chinese banks not to have a presence in Hong Kong—or anywhere else outside of China for that matter. Buying an established business with a pre-existing branch network and customer base is both quicker and cheaper than building one from scratch and Wing Lung's 35 Hong Kong branches will give CMB a solid base from which to expand operations. The Shenzhen-based bank, which ranks as the sixth largest lender in the mainland in terms of assets, is particularly strong within retail banking. It is also in the process of building a private banking business, which it can now be expected to take across the border and target at Chinese nationals living abroad.
This explains why CMB was so keen to buy Wing Lung, which had about $12 billion of total assets at the end of March. But it is also important to note that there is a scarcity of banks available for acquisition in Hong Kong where the smallest banks are typically controlled by families who are unwilling to sell - a fact that would have further increased its resolve not to miss out. This is the first M&A activity in the sector since Malaysia's Public Bank agreed to buy Asia Commercial Bank in February 2006. Investors have been snapping up some of the other potential takeover candidates, including Wing Hang Bank, Chong Hing Bank and Dah Sing Bank, since Wing Lung announced in March that its owners were in talks with several potential buyers in the hope that a deal would spark a wave of other acquisitions in the sector. Analysts note that another deal is unlikely in the near-term though, particularly in the wake of the recent surge in share prices. Since the March announcement, Wing Hang Bank has gained 15.2%, Chong Hing Bank is up 36% and Dah Sing Bank has added 35%.
Wing Lung itself has been identified as a potential target for years, but has never actually been in play. The fact that it is now finally being sold is believed to be at least partly a result of the fact that there is a generational change going on and the younger generation is more keen to monetise the holdings. And for the first time, the two families that control the bank—who are related and both named Wu—were in agreement to dispose of the bank which was set up in 1933.
Credit Suisse and UBS each advised one of the families and also acted as joint representatives for Wing Lung Bank.
"Despite the subprime crisis, bank valuations continue to be reasonably robust in the M&A space and the privatisation of Chinese banks has created a large pool of potential buyers," notes one source.
True, but the recent credit crunch has also resulted in a tougher operating environment and may have influenced the final decision to find a buyer with a strong balance sheet. Wing Lung's net interest income fell by 1.4% to HK$360.1 million ($46 million) in the first quarter from a year earlier, and it also recorded impairment losses of HK$284.4 million related to investments in structured investment vehicles (SIVs) and unrealised losses of HK$192.3 million due to a revaluation of its investments in collateralised debt obligations (CDOs). This resulted in a first quarter net loss of HK$82.5 million compared with a net profit of HK$376.2 million a year earlier. The bank also said that as of the end of March the net carrying value of its remaining SIV and CDO portfolios amounted to approximately HK$566.6 million.
CMB will pay HK$156.50 per share for the stake held by the Wu families and will later make a general offer to minority shareholders at the same price, which represents a 6.2% premium to Thursday's closing price of HK$147.40. (Wing Lung and CMB were both suspended on Friday to sign the deal.) The shares have gained more than 80% from a low just below HK$80 since rumours about the acquisition started to emerge in early March, however. They rallied 22% in the two sessions before and after Wing Lung's initial announcement on March 20 that the owners were considering a sale.
On Wednesday last week, before the deal was signed, ANZ chief executive Michael Smith, who until last year was CEO of HSBC, referred to CMB's bid at 3.1 times book as "crazy" and said ANZ would not get into a costly bidding war for a bank that made a first-quarter loss. "That's crazy! Why would you pay three times book price for an institution like that?" Smith was quoted by local media as saying. However, at the same time he argued that Wing Lung was still in play and said ANZ had not lost the bid for control of the Hong Kong lender. Two days later CMB's win was a fact.
Others argue that the price is not too far from other transactions in recent years and, considering the scarcity of bank assets in Hong Kong as well as the lack of overlap between CMB and Wing Lung, it is reasonable. Public Bank paid 2.5 times book for Asia Commercial Bank and ICBC's acquisition of Macau-based Seng Heng Bank in August last year was completed at 2.3 times book. CMB itself, which is listed in both Hong Kong and Shanghai, trades at 5.4 times book.
The upfront payment of about $2.48 billion to the Wu family will be settled in cash that will come primarily from internal resources. According to a source, the bank will probably need to seek external financing for the general offer, although this shouldn't be a problem as it already has plans in place for that event.
The Hong Kong Monetary Authority has noted that it has no objection in principle to the acquisition.