Chris Hughes is a Bloomberg Gadfly columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

Investors are cheering a rare sight -- a major bank deal. First Gulf Bank and National Bank of Abu Dhabi have agreed to combine to create the Middle East and North Africa’s largest bank by assets. It’s the latest big transaction to be hailed as a merger of equals, although it’s clear the terms were the subject of some back and forth.

A rally in both stocks has pushed the pair's combined market value up to 112 billion dirhams ($30.5 billion), from 94.6 billion dirhams just before talks became public in mid-June. That shows high hopes for the financial benefits of the deal. The value creation being priced in is worth 17 billion dirhams.

Yet the net present value of the announced $136 million annual cost savings may be only about $1.3 billion, or 4.8 billion dirhams, taxed and capitalized. Still, it's rational to expect the deal to deliver more than that: the stated savings are only 8 percent of combined costs, which is unambitious for a big financial services combination.

First Among Equals
National Bank's shares have done better since the proposed deal became public
Source: Bloomberg

One possible hope is that the merged bank will benefit from lower overall funding costs. NBAD has a stronger credit rating so that might help FGB. But if FGB is currently paying more for wholesale funding because of higher perceived riskiness, the reality is that doing a deal with a more solid partner won't magic that away.

Credit-rating firms may nevertheless see some implicit financial support from the government for the group. Abu Dhabi will have a 37 percent holding via its existing 69 percent stake in NBAD and 7 percent holding in FGB.

Whatever the true value creation, the government will share in it disproportionately thanks to its outsize holding in NBAD, which is receiving a small premium under the terms. NBAD contributed 44 percent of the combination’s total market value based on undisturbed share prices, but its shareholders will own 48 percent of the tie-up. FGB shareholders will receive a share below what they put in. That value transfer persists even using three-month moving average share prices prior to talks becoming public.

The terms essentially assume that the market was undervaluing NBAD going into the transaction, at about 1.2 times book value against FGB’s multiple of about 1.8 times. But there’s no clear reason to think the market was wrong. True, NBAD’s shares might have suffered an artificial discount for reduced liquidity. Still, the valuation differential was there for a reason: FGB was growing faster and had higher returns. 

What does the FGB side get? It's providing the CEO and chairman, which may inspire some confidence in the ability to drive NBAD more aggressively. Like so many attempted mergers of equals, the specifics have been skewed in places for the sake of reaching an agreement. But, on this occasion, both sides still look better off as a result.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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Chris Hughes in London at

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James Boxell at