Shares of Dao Heng Bank and parent company Guoco Group soared on news of the lender's sale to Singapore's DBS Group in a transaction that could be worth up to S$10 billion (about HK$43.18 billion). Dao Heng Bank rose 51.6 per cent to HK$57, while Guoco increased 40.36 per cent to HK$38.60. Dao Heng's rise accounted for most of the gain in the Hang Seng Index, which closed up 2.22 per cent to finish at 12,989.47 points. In Singapore, DBS shares fell 9.8 per cent to S$13.80, as analysts said the transaction - at more than three times Dao Heng's book value - was expensive. But they said the deal was necessary if DBS was to have a substantial presence in Hong Kong in its bid to become a pan-Asian bank. 'It is something DBS had to do,' Lehman Brothers banking analyst Grant Chan said. UBS Warburg's Singapore banking analyst Jaj Singh said the strategic value of the deal for DBS would become apparent in the medium term. 'We believe this is the transformational deal that will help DBS propel itself to the status of a true regional bank,' Mr Singh said. But he said the offer was 'somewhat on the high side' and cut his price target for DBS from S$19 to S$17. Shareholders of Dao Heng have been offered cash of HK$60.14 per share - a premium of 59.9 per cent on the closing price before suspension. The alternative offer was HK$43.26 and one share in a wholly owned DBS subsidiary per Dao Heng share. The shares in the DBS subsidiary are subject to a put/call arrangement and will be exchangeable for HK$21.70 in December 2002. Some analysts said the cash-and-share arrangement was more attractive as it effectively gave shareholders HK$21.70 at the end of next year for lending DBS HK$17 per share. This equated to an annualised interest rate of 18 per cent, according to UBS Warburg's Hong Kong banking analyst Tracy Yu. Analysts were sceptical that the transaction would lead to further consolidation in Hong Kong's banking sector. 'The outlook for Hong Kong banks has not changed that much,' said Credit Suisse First Boston banking analyst Mehdee Reza. 'Over the last few years there have been many transactions [in Hong Kong's banking sector]. However, genuine reduction in excess capacity of the banking system hasn't crystallised.' Although the case for consolidation is compelling, many Hong Kong banks are owned by families who are reluctant to give up control. Some other small banks have risen sharply in the last week on speculation that they may be targets. But analysts expect such rallies to fall back.