OCBC-Wing Hang Bank takeover deal a question of price
While city lender wants more, Singapore group fears making goodwill charges after takeover
Oversea-Chinese Banking Corp's plan to take over Wing Hang Bank, the city's second-largest family-controlled bank, raises the question of what would be a reasonable price for both parties to gain from the deal.
Although OCBC is reluctant to pay too much - bearing in mind that others had to make massive goodwill provisions after the acquisition of banks in Hong Kong - analysts expect it to cough up close to twice book value and possibly higher than the 2.08 times deal for Chong Hing Bank.
Only three family-controlled banks are left in the city after Yue Xiu's bid - backed by the Guangzhou government - for Chong Hing, in October last year.
Wing Hang has confirmed it was holding exclusive talks with OCBC until the end of the month for a possible sale to the Singaporean bank.
While OCBC might be prepared to pay about 1.9 times book value, Wing Hang had always aspired for more, reports said.
"Wing Hang carries a scarcity value," said Grace Wu, an analyst at Daiwa Capital Markets, which expects a price at two times value.
The bank ranks second in size by assets among the three family-owned banks, which makes it more affordable to a buyer than Bank of East Asia, which has more than twice Wing Hang's market capitalisation.
Wing Hang is 25 per cent larger than Dah Sing Bank. Both have about 70 branches in Hong Kong, Macau and on the mainland.
Dominic Chan, an analyst at BNP Paribas, expects a price of 2.3 to 2.4 times book value to get the deal done. "Given a sizeable franchise for Wing Hang, a clean balance sheet and stable profitability, there is no reason for it to be forced to sell cheaply and urgently," he said.
However, if the buyer is also a bank, with potential duplication of business, some consolidation might be necessary, leading to a discount in the price.
OCBC's shareholders might be hesitant to approve too hefty a price in the wake of China Merchants Bank's goodwill provision of 579 million yuan (HK$741 million) after it paid HK$19.3 billion to acquire Wing Lung Bank in 2008, and DBS's write-down of at least S$2.1 billion (HK$12.8 billion) after its US$5.4 billion purchase of Dao Heng Bank in 2001.
Given that the Wing Hang deal would be more than double the size of the Chong Hing transaction, an analyst said it would not be fair to apply 2.08 times book value as a benchmark price for Wing Hang.
"Since the acquisition of Chong Hong was smaller, a slight difference in the price-book ratio would have made no significant difference to the absolute value of the deal," said the analyst, who asked not to be named.
However, a difference of 0.1 times book value would translate into HK$2 billion for Wing Hang, compared with HK$743 million for Chong Hing.
"It is hard to convince shareholders to pay more than two times book value," the analyst said. He expects the offer at 1.7 to 1.9 times book value.
Meanwhile, Fitch Ratings said Wing Hang would gain an advantage over its rivals in developing its business on the mainland if the deal went through.
"Strategic investment by a larger player would give it improved flexibilities in funding and capital, and potential access to clients - necessary ingredients for expansion in a riskier but higher-growth market," Chikako Horiuchi, a director of financial institutions, wrote recently.