The Boards of Directors of Access Bank and Diamond Bank yesterday announced a proposed merger of the two banks. Following weeks of speculation on the strategic investor, Diamond Bank was looking to bring on board, both banks have released official statements on the Nigerian Stock Exchange stating that Access Bank would acquire the entire issued share capital of Diamond Bank in a transaction that is expected to be completed in the first half of 2019.
Details so far…
According to the press releases, Diamond Bank shareholders will be receiving a consideration of ₦3.13/share on this transaction, which compares favourably with Diamond Bank’s closing price of ₦0.87/share on December 13, the date of the final bidding offer. Specifically, this consideration would comprise ₦1.00/share in cash and the balance of ₦2.13 will be in form of a share exchange allotted on the basis of 2 New Access Bank (resulting entity) ordinary shares for every 7 Diamond Bank shares held. On the share allotment basis, the value of the New Access Bank is estimated at ₦7.46/share – marginally above Access Bank’s share price of ₦7.45 as at Dec 13, date of the final bidding offer. We note that the completion of this transaction is still subject to shareholder and regulatory approvals after which
Diamond Bank would be absorbed into Access Bank and would cease to exist upon the merger becoming effective.
Given Diamond Bank’s shares outstanding of 23.16 billion units, ACCESS will be paying ₦23.16 billion as cash consideration on the deal – this comes to 5% of the company’s total shareholder’s fund as at 9M’18. Meanwhile, based on the share exchange ratio, an allotment of 6.62 billion New Access Bank shares will be issued, potentially raising total ordinary shares outstanding by 25% to 32.92 billion units.
Expected impact of the acquisition on both sides
While we await further details to adequately evaluate the impact of this transaction, a rough analysis of the details so far appears to be promising to investors on both sides. For Diamond Bank shareholders, the offered payout comes at a highly attractive price point of ₦3.13/share – which is 260% above Diamond Bank’s market price of ₦0.87/share (as at Dec 13) and a substantial premium when compared to the stock’s 90-Day (₦0.95) and 180-Day (₦1.05) VWAP. Also, this valuation stands at a 224% premium to Consensus Analysts’ Target Price of ₦1.40 for Diamond Bank shares. Notably, the stock was on full bid following this, gaining 947bps on the day of the announcement. Meanwhile, looking at Diamond Bank’s book value per share of ₦9.15 (as at 9M’18) the Tier II bank was valued at 0.34x its book value – 3-year average price/book value of 0.18x).
Away from pricing, the combination is expected to make the New Access Bank the largest commercial bank in Nigeria by deposits – ₦3.54 trillion in total vs ₦3.26 trillion of FBNH, current largest. The New Access Bank is also expected to have a gross loan book of ₦2.8 trillion, potentially the largest in the industry. That said, given Diamond Bank’s high NPL ratio of 12.6% (as at 9M’18), New Access Bank’s asset quality could take a hit with a possible nonperforming loan ratio for the resulting entity estimated at 7.0% (NPL ratio for Access Bank as at 9M’18 was 4.7%) – slightly above the regulatory benchmark of 5% – even as cost of risk also edges up.
While we await further details to build a financial model for the enlarged entity so as to determine if the business combination will be value accretive or dilutive in the near term, a 25% rise in shares outstanding outweighs the potential 12% increase in bottom line of the enlarged entity (using FY’19 Consensus Analysts’ figures) given Diamond Bank’s recovering earnings base. Nonetheless, in the medium to long-term, the larger scale and market share of the New Access is expected to be an advantage with the stronger liquidity position expected to support potential moderation in the cost of funds and possibly stronger net interest margins as well. The New Access is also well suited to benefit from Diamond Bank’s strong retail footprint, given the consistent and notable growth recorded across its retail banking channels and boasting of over 3.3 million customers on its mobile app as at 9M’18.
While this transaction may be a surprise, we note that it is well in line with Access Bank’s aggressive growth strategy to become the number one bank in Africa as outlined in its 2018-2022 Strategy presented to stakeholders in December 2017.
Though post-acquisition integration will be challenging, we highlight:
(i) Access Bank’s historical experiences from when it acquired Intercontinental Bank in 2012 and
(ii) the similarities in both banks operations, as both, utilize the Oracle Flexcube as their core banking solution.
That said, downside risks persist and the medium-long term gains from this transaction will accrue sufficiently on a well-executed integration process. Overall, we expect a positive reaction from market participants to the news as the market awaits more traction in approvals.