The banking sector was rocked on Monday after the Nation newspaper purportedly reported that Access Bank was considering acquiring Diamond Bank Plc. Diamond Bank and Access Bank have both issued press releases denying that no deal for a potential acquisition was being discussed.
Access Bank had acquired Intercontinental Bank, considered bigger at the time, in a deal that catapulted the former into tier one status. Diamond Bank, on the other hand, has been embroiled in several reports questioning its capital adequacy and liquidity, increasing speculations that it could be seeking a potential capital injection. With Access Bank in the picture, the pressure has all but increased for the Tier 2 bank to shore up its capital either organically or attracting investments from an external source.
Is an Access Bank Merger plausible?
Whilst both Access Bank and Diamond Bank have denied these reports, analysts at Nairametrics have pondered on the potential possibility of a takeover of Diamond Bank by Access Bank. Why would Access Bank want to acquire Diamond Bank? How will the acquisition be consummated? What will be the purchase consideration and how will Access Bank pay for it? Let’s consider a few scenarios;
Why would Access Bank acquire Diamond Bank?
When a company desired to acquire a target it is either to help kill competition or to expand footprint and market share. Acquiring Diamond Bank will not necessarily kill competition for Access Bank as they still need to contend with the rest of the FUGAZ (an acronym for the big five banks in Nigeria). However, the acquisition allows Access Bank to increase its market share.
Access Bank currently has a total asset base (as at September 2018) of about N4.5 trillion and Diamond Bank, N1.5 trillion. Combined will deliver an asset base of about N6 trillion and larger than Nigeria’s largest bank by Asset Base, Zenith Bank at about N5.6 trillion. For a bank looking to rise to the top inorganically? A potential acquisition of Diamond Bank seems logical.
How will the acquisition be consummated?
To acquire Diamond Bank, Access Bank can explore a number of options which are cash, cash plus equity or strictly equity. Both banks will have to employ the services of financial advisors and deal arrangers.
How much will Diamond bank be worth?
Based on today’s market price Diamond Bank is valued at about N26.8 billion a whopping 88% discount to its book value (equity) of about N221.6 billion. Surely, if Access Bank were to attempt an acquisition of Diamond Bank it will have to pay significantly higher than its equity. At a premium of 1.5x to equity, the bank could be worth about N320 billion only. If it were to sell for the same price to book ratio of GTB, the most expensive stock, then it could be worth about N442 billion.
How will Access Bank pay for it?
As mentioned earlier, Access Bank could pay a full cash or a combination of cash plus equity or just equity. Does Access Bank have N442 billion in cash? Access Bank’s total shareholder’s fund is currently N464 billion, thus on paper, it may not have the capital to fund such a transaction. However, it has a total of N1.3 trillion in cash and balances with banks.
Whilst most of this cash include depositors money, it could fund an acquisition from this cash allowing it some time to raise equity via a rights issue to plug the hole. Prior banking acquisitions in Nigeria took this route.
It could well fund the transaction with a combination of cash plus equity. Assuming a 50/50 split, it could offer Diamond Bank shareholders about 28.3 billion new shares in Diamond Bank and cash of about N220 billion. This seems like a bad idea considering that Access Bank shares outstanding are a little above 28.9 billion.
Also, Access Bank is somewhat undervalued and trading at less than 47% of its book value. To move towards this route, Access Bank shares will probably be double if not triple its current share price. Watch out for this, if indeed an acquisition is in the offing.
Funding this transaction with pure equity is a plausible but unlikely route in our opinion. It will be too expensive for Access Bank shareholders.
Finally, a potential acquisition of Diamond Bank by Access Bank is plausible as the latter has the balance sheet to consummate this transaction. How this will pan out is a lot more complicated than described above as these deals involve a lot more valuation haggling, trade-offs, and compromises. Nevertheless, it is one that could jolt the financial services sector and perhaps launch Access Bank as the largest bank by balance sheet in Nigeria. On the downside, Access Bank may have to rake in some downside losses if reports by some analysts that it still has more bad loans to write off are true.