DBS Group Holdings early yesterday confirmed that it has entered into an agreement to buy Temasek Holdings’ 67.4% stake in Bank Danamon Indonesia for Rp45.2 trillion ($4.9 billion), which will be paid entirely through the issuance of new shares to Temasek.
DBS will also make a mandatory tender offer to Danamon’s minority shareholders. If the tender is accepted in full, the acquisition will cost DBS a total of $7.2 billion. This would make it the largest-ever M&A transaction in Indonesia and the second largest in Southeast Asia, according to Dealogic.
Singapore-listed DBS will pay Rp7,000 per share, which translates into a 52.2% premium to Danamon’s closing price of Rp4,600 last Friday and a 56.3% premium to the one-month volume-weighted average price (VWAP). The acquisition price values the Indonesian bank at 2.6 times its book value at the end of 2011, which is slightly below the three times book that observers expected it may have to pay.
However, the deal offers a significant premium (62.8%) to the shareholders who bought shares as part of Danamon’s $586 million rights issue in August last year, which was priced at Rp4,300 per share. Temasek took up its portion of that deal in full.
Both DBS and Danamon were suspended from trading yesterday so the market hasn’t yet delivered its verdict on the deal. However, DBS’s Group CEO, Piyush Gupta, excitedly told reporters yesterday that he viewed Danamon as a “perfect match” for DBS as it seeks to diversify and rebalance its business, which until now has been depending “too heavily” on Singapore and Hong Kong.
“By adding this single engine, we are changing our growth profile with regard to both earnings and assets,” he said, noting that DBS will go from being a low-margin bank to one with a significant presence in high-growth markets. Danamon, which has a nationwide footprint, about 3,000 branches and approximately 6 million customers, will be integrated into DBS’s existing Indonesian business to create the fifth largest bank in Indonesia in terms of assets.
Prior to the Danamon acquisition, which is expected to be completed in the second half of this year, DBS derived only 11% of its revenues from high-growth markets in China, India and Indonesia. That will now increase to 30%. The portion of revenues derived from South and Southeast Asia (outside of Singapore) will increase to 27% from 7%, while Singapore’s contribution will fall to 49% from 62%.
As if to drum home the message of geographical diversification, DBS also announced yesterday that it has received approval from the Malaysian central bank to start discussion on the acquisition of an effective economic stake of about 14% in Malaysia’s Alliance Financial Group. DBS would be buying its interest from the same Temasek entity that is currently holding the Danamon shares.
Based on proforma numbers provided by DBS, Danamon would have added about $2 billion of revenues to DBS’s 2011 numbers and about $460 million of net earnings, bringing the total revenues to S$9.5 billion ($7.55 billion) and the total net profit to S$3.36 billion. Danamon’s revenue contribution would have been 21% and it would have added 14% to the bottom line.
At the same time, this is not a particularly risky or aggressive transaction for DBS, Gupta said, as Danamon will contribute only 5% to total assets, 6% to net loans, 5% to customer deposits and 7% to risk-weighted assets. Similarly, DBS’s cost-to-income ratio will increase only moderately to 46% from 43%, its non-performing loan ratio will edge up a notch to 1.4% from 1.3% and its loan-to-deposit ratio will rise to 88% from 86%.
Because the majority of the acquisition will be settled through the issuance of new shares, it will also have a modest impact on capital ratios. Proforma numbers suggest DBS’s total capital adequacy ratio will fall to 14.7% from 15.8%, while its core tier-1 ratio will drop to 10.3% from 11.0%. Both will still be comfortably above the required levels, the bank said.
DBS estimates that the acquisition will be accretive by 2015 with regard to earnings per share and return-on-equity. The integration of Danamon into DBS’s existing Indonesian business, which has 40 branches, just over 1,000 employees and a net income of S$52 million in 2011, will begin next year and the synergies will be phased in from 2014, it said.
As payment for the 67.4% stake, DBS will issue 439 million new shares to Fullerton Financial Holdings, an entity wholly owned by Temasek, at a price of S$14.07 per share. The price is based on the two-week VWAP up until March 28, just before DBS approached Fullerton with its bid, adjusted for a final 2011 dividend of S$0.28 per share that was announced in February. DBS’s share price closed at S$14.18 on Friday.
The new shares will increase Temasek’s stake in DBS to 40.4% from 29.5%, which is a somewhat surprising move, given that Temasek too has been saying that it wants to increase its investments outside of Singapore. The investment holding company has received a waiver from having to make a general offer to DBS’s minority shareholders, which it would otherwise have been required to do as its shareholding rose above 30%.
The share swap also means that Temasek will keep a significant exposure to Danamon, which suggests that it is not selling because of a lack of faith in Indonesia. One source said that Temasek likely recognises that Danamon has to some extent outgrown its independent platform and has a much better chance of continuing to grow quickly as part of a regional banking platform like DBS’s than it would being backed by a financial investor.
“Indonesia is an exciting Asian market and we believe that we will be able to contribute towards the growth of the Indonesian banking sector, especially in areas such as infrastructure financing, project financing, trade finance and shar’iah banking,” Gupta said.
If Danamon’s minority shareholders accept the mandatory tender offer in full, DBS will have to pay up S$2.9 billion ($2.3 billion) in cash. It will fund this portion from a combination of internal cash and a potential issue of senior debt. However, it is unlikely that all shareholders will tender their shares. Indonesian regulators don’t like companies to be delisted, and according to a DBS announcement yesterday, the bank will need to maintain a 20% free-float. If it ends up with an ownership of more than 80% following the tender offer, it has two years to sell down its stake.
The transaction needs regulatory approvals in both Singapore and Indonesia and DBS will also need the approval of its independent shareholders before it can clinch the deal.
As reported yesterday, Credit Suisse and Morgan Stanley are advising DBS on the acquisition and DBS has now also hired ING as an independent financial adviser. Citi and Deutsche Bank are advising Danamon. Bank of America Merrill Lynch is advising Fullerton Financial.
