DBS seals Dao Heng deal
The biggest banking takeover in Hong Kong in recent years finally went through last night when Singapore's DBS Bank confirmed it had gained control of Dao Heng Bank in a deal worth up to S$10 billion (HK$42.9 billion).
The deal - first revealed in Business Post on Monday - makes DBS the fourth-largest bank in Hong Kong in terms of assets after HSBC, Bank of China and Standard Chartered.
The acquisition is an important part of DBS' efforts to become a pan-Asian bank.
'It's the realisation of the first Asian regional bank,' DBS Group chairman S. Dhanabalan said.
'We see Hong Kong as the second hub of our Asian presence.'
Following the acquisition, almost 40 per cent of DBS's revenue will come from outside its Singapore base, according to DBS chief executive Philippe Paillart.
The deal could herald further consolidation in Hong Kong's banking sector as the industry enters a period of deregulation.
Recent consolidation in the sector includes Bank of East Asia's HK$4.36 billion acquisition of FPB Bank Holdings in January and Standard Chartered's US$1.32 billion purchase of Chase Manhattan's retail business.
DBS expects gains of HK$275 million per year in revenue from the merger of Dao Heng with DBS Kwong On Bank.
On the cost side the bank expects to see savings in the combined operations of HK$265 million per year.
However, DBS chief operating officer Jackson Tai said the bank was concentrating more on the revenue gains from the merger.
'This is primarily a revenue expansion story,' said Mr Tai.
DBS intends to keep the same management team at Dao Heng Bank, according to Mr Paillart.
'Our number one objective is to keep the teams as they are,' Mr Paillart said.
Guoco Group chief executive Kwek Leng Hai said the firm had sold Dao Heng to DBS as it offered the necessary scale and capital to expand overseas.
Guoco, which holds 71.3 per cent of Dao Heng Bank, is studying what investments to make with the initial S$5.4 billion proceeds from the sale of its stake.
'We are currently studying a range of options,' Mr Kwek said.
Dao Heng shareholders have been offered cash of HK$60.14 per share, which is a premium of 59.9 per cent on the bank's last closing price.
The second alternative is an offer of HK$43.26 per share in cash and one share in DBS Diamond Holdings - a wholly-owned subsidiary of DBS - per Dao Heng share.
Guoco has said it would take the cash and share alternative for its majority stake. If all other shareholders take the cash option DBS would hold an effective 80 per cent stake in Dao Heng and Guoco the remaining 20 per cent via its shares in DBS Diamond Holdings. Under this arrangement the deal would cost S$7.6 billion, according to Mr Dhanabalan.
If all other shareholders take the cash option the purchase price is 3.07 times its book value of HK$19.60 per share using an estimated value at June this year. If public shareholders opt for the cash and share option, valued at HK$62.07 per share, the price-to-book-value is 3.17 times.
The shares in DBS Diamond Holdings are subject to a put/call arrangement with an exercise price of HK$21.70. The options can be exercised for a period of only seven business days and will cost DBS another S$2.4 billion if fully exercised, according to Mr Dhanabalan.
DBS intends to raise US$1.1 billion in the debt market to help replenish its capital and would like to raise another US$500 million from other sources. It may issue new shares as part of its capital raising exercise, according to Mr Tai.
Ratings agency Standard & Poor's placed DBS Bank's credit rating under review for a possible downgrade and Dao Heng Bank for a possible upgrade following the announcement of the deal.
Meanwhile Moody's affirmed DBS' credit rating and placed Dao Heng under review for a possible upgrade.
Graphic: ragg12gbz