Alpha Bank SA, Greece’s third-largest lender, will buy EFG Eurobank Ergasias SA and increase capital by as much as 3.9 billion euros ($5.7 billion) to ride out a deepening recession and the country’s sovereign debt crisis.
Alpha will offer Eurobank investors five new shares for each seven they hold, or 0.714 Alpha shares for each Eurobank share, according to a statement from the banks in Athens today. That values the deal at about 750 million euros, according to Bloomberg calculations based on Aug. 26 closing prices.
Following the merger, the bank plans to strengthen its finances with a 1.25 billion-euro rights offer, a 500 million-euro convertible note to be taken up by Qatari-backed Paramount Services Holding Ltd., and more than 2.1 billion euros of internal measures, the statement said. That will help give the lender a core Tier 1 capital ratio of 14 percent, even after accounting for writedowns of Greek government bonds, the companies said.
“This merger is a decisive step in the strengthening of the private sector economy at a crucial juncture in Greece’s history, demonstrating the ongoing support of leading international investors,” said Yannis Costopoulos, the chairman of Alpha Bank. “I am delighted to welcome Paramount’s increased participation in the enlarged bank.”
The combined bank will have 146 billion euros of assets and 1,300 branches across eight countries, including a top-three position in Romania, Serbia, Bulgaria and Cyprus. The Qatar investors, who already hold a stake in Alpha Bank, will have the biggest single shareholding in the merged company, according to the statement.
Alpha Bank rose 30 percent, the daily limit, to close at 2.47 euros and EFG Eurobank leapt 29 percent on the Athens exchange to 2.24 euros. Competitors also surged. National Bank of Greece SA, the country’s biggest bank, added 29 percent to 3.59 euros, the same gains as Piraeus Bank SA. Greek stocks rallied, with the ASE General Index climbing the most in more than 21 years.
“Capital is scarce and a deal could enable the banks to access the market and private investors,” said Alexander Kyrtsis, a senior banking analyst at UBS AG in London, before the announcement.
The announcement came after Christine Lagarde, the new International Monetary Fund chief, said European banks should be forced to build up their capital to prevent the continent’s debt crisis from infecting more countries.
Bolstering banks’ balance sheets “is key to cutting the chains of contagion,” Lagarde said on Aug. 27 in remarks at the U.S. Federal Reserve’s annual forum in Jackson Hole, Wyoming. Without an “urgent” recapitalization, “we could easily see the further spread of economic weakness to core countries, or even a debilitating liquidity crisis.”
Alpha Bank reported today a second-quarter net loss of 535.3 million euros, compared with a year-earlier profit of 48.7 million euros, after a writedown of its Greek government bonds. The portfolio was impaired by 600 million euros after a 21 percent haircut on the bonds that are held to maturity, according to a statement today. Eurobank reported a second-quarter net loss of 661 million euros after a writedown of its Greek bond holdings, the Athens-based lender said today.
European Union and Greek officials, including central bank chief George Provopoulos, have pressed the country’s lenders to form stronger groups that can survive a crisis that has depleted capital as bond prices slump, loan-losses mount and banks lose deposits. Lenders have been left reliant on funding from the European Central Bank. Combining banks may lead to stronger balance sheets, cost savings and better access to capital.
Share prices in Greece’s lenders plummeted last week as the country grappled with a third year of recession and the government pursued negotiations on a second bailout package, which will entail losses for bondholders. Alpha’s shares fell 26 percent to 1.9 euros and Eurobank declined 22 percent to 1.73 euros.
Alpha Bank and Eurobank ended the week with a combined market value of barely 2 billion euros, according to Bloomberg data, down from about 23 billion euros at the end of 2007.
The chairman of the new entity will be Costopoulos with two co-chief executive officers, Demetrios Mantzounis and Nicholas Nanopoulos.
The country’s recession and struggle to avert default led deposits by businesses and households to fall for a sixth straight month in June, the Athens-based Bank of Greece said on Aug. 9. Deposits have declined by 21.4 billion euros since December 2010, or 10 percent, with the withdrawals forcing Greek banks to borrow more from the central bank as money markets remain shut.
They owed the ECB 103.3 billion euros in June, up from 97.5 billion euros in May, according to Greek central bank figures released on July 25.
The Paris-based Organization for Economic Cooperation and Development said in a report on Aug. 2 that Greek banks should look at mergers with foreign lenders to help them gain market funding and shouldn’t rush to reduce reliance on the ECB.
The OECD sees Greece’s economy contracting 3.5 percent this year and growing 0.6 percent in 2012. The European Commission estimates Greece’s debt will peak at 161 percent of gross domestic product in 2012.
The effect of a government bond swap, part of a 159 billion-euro EU financing package agreed to on July 21, may mean writedowns of about 4 billion euros in the second quarter for Greek banks, UBS’s Kyrtsis said in an Aug. 26 report. That, combined with bond buybacks and a review commissioned by the central bank of loan portfolios, “may lead to recapitalizations of up to 6 billion euros, further asset disposals and mergers and acquisitions in following months,” he wrote.
Eurobank, with 8.7 billion euros of Greek bonds, was one of two Greek lenders which failed European stress tests last month, with a Tier 1 capital ratio, a measure of financial strength, of 4.9 percent under adverse conditions, below a 5 percent minimum.
The founding Costopoulos family is the largest shareholder in Alpha, with Paramount, which represents one of the most prominent families in Qatar, the next biggest, with a 3.1 percent stake, Bloomberg data show. Alpha sold a 4 percent stake to Paramount in June 2008 for 296 million euros.
The three core shareholders, including the Latsis shipping family, “support the proposed merger and capital plan,” the statement said. The new bank will be called Alpha Eurobank, according to Costopoulos.
On completion of the deal, Paramount will own 17 percent of Alpha Eurobank, with the Latsis family -- the biggest shareholder of Eurobank -- holding 13 percent. The Costopoulos family will own 4 percent.
The transaction is the second merger attempt this year involving Alpha. The lender spurned an unsolicited offer by National Bank in February, citing the “uncertainties of the current environment,” according to a statement at the time. National Bank holds 18.8 billion euros of Greek bonds, the largest among the four biggest banks, while Alpha holds 5.5 billion euros.
National Bank is planning to increase its core Tier 1 capital ratio to more than 13 percent from its current 12 percent by selling a stake in its Turkish unit Finansbank AS, Chief Executive Officer Apostolos Tamvakakis told shareholders at its annual meeting June 23.
The sale of a 20 percent stake in the unit will proceed when conditions are “appropriate,” he said.
A National Bank official who declined to be identified said the bank was supportive of consolidation and had “taken active steps to demonstrate this.” In that context the Alpha and Eurobank initiative was in the right direction, he said.
Alpha was advised on the transaction by Citigroup Inc. and JPMorgan Chase & Co., while Eurobank received advice from Goldman Sachs Group Inc., Rothschild and Barclays Plc.