DBS said on Wednesday that it would let its offer to buy a 67.37% stake in Bank Danamon Indonesia lapse, thwarted by Jakarta’s decision to limit its influence over the bank.
DBS had planned to buy the stake in Danamon from Singaporean state-run investment fund Temasek Holdings, but it become embroiled in a political tit-for-tat between Singapore and Indonesia over reciprocity of market access.
"We would like to express our deepest appreciation to the regulators in Indonesia and Singapore for giving the transaction due consideration,” said Piyush Gupta, chief executive of DBS in a statement on Wednesday.
However, the deal’s collapse could pave the way for other banks from Japan, China or Australia to bid for Temasek’s stake, said M&A bankers. Temasek may even gather higher offers despite the worsening macroeconomic climate, they added.
Other deals since Singapore-headquartered DBS agreed to buy Temasek’s stake have been sealed at higher valuations. DBS offered 2.6 times price to book for Danamon but Sumitomo Mitsui Financial Group recently acquired Bank Tabungan Pensiunan Nasional at 4.5 times. Earlier Malayan Banking Bhd (Maybank) bought PT Bank Internasional Indonesia Tbk at 4.7 times book value.
The allure is clear: Indonesia is the fourth-most populous country in the world and the country’s middle and affluent class is expected to grow during the next few years and use more banking services.
However, other bidders may worry that they will also become enmeshed in political brinkmanship, as befell DBS. Some might not be prepared for the media attention that came with the largest ever acquisition of an Indonesian company.
In April last year, it agreed to buy Temasek Holdings’ 67.4% stake in Bank Danamon for $4.9 billion, which would then trigger a mandatory takeover offer for the rest of the shares.
However, the deal was delayed after Indonesian authorities moved to limit foreign ownership in its banks.
In May, news reports quoted Bank Indonesia’s governor Darmin Nasution saying that DBS is allowed to buy a 40% stake in Danamon, but that it would be allowed to buy a further stake in the bank only if Singapore showed “reciprocity” by allowing Indonesia’s banks to open more branches there.
It wasn’t clear what reciprocal access entails. Analysts suggest that Bank Indonesia wants its three state banks to have branches and ATMs in Singapore. At present, only Bank Negara Indonesia has a branch in Singapore. Bank Rakyat and Bank Mandiri do not have branches.
DBS responded in a statement to the Singapore Exchange, saying that it had not received official written notification of the approval and that it “hopes the application will be approved as originally submitted”.
The bank had long indicated that it is not keen on minority stakes — which do not offer control and require capital to be set aside under Basel III rules.
They may also be concerned that they too will not in the future be able to raise their stake from a minority holding.
Other banks have been buying minority stakes in Indonesian banks. Malaysian lender RHB Capital is acquiring 40% of Indonesia’s Bank Mestika Dharma, but clearly harbours ambitions to buy a majority stake.
Some bankers and politicians had hoped that Gupta would take the 40% on offer and wait until the rules changed to acquire more.
A blow for DBS
For DBS, the deal’s collapse is a blow. It is the largest lender in Singapore but outside of the city state, it has lacked a meaningful Asean presence compared to its peers UOB and OCBC.
“I’m a big believer in Indonesia,” said Gupta, in an interview with FinanceAsia in early June. “What an inorganic deal like Danamon allows us to do is accelerate the process of growth from the usual 2% to 3%, to a 10% lift in one year.”
Gupta had hoped to replicate the universal bank strategy that DBS has in place in Singapore.
He also saw synergies between DBS and Bank Danamon. For one, Danamon’s micro-lending business and its auto-financing subsidiary Adira face growth constraints, due in part to Danamon’s lack of funding. Danamon which competes against state-owned banks such as Bank Negara Indonesia and Bank Mandiri, struggles to attract deposits and is faced with an expensive cost of funding. DBS, with its Aa1/AA- rating has plenty of surplus money, and would be able to fund Bank Danamon.
Gupta was also hoping to extend its expertise in the treasury business — including foreign exchange and hedging products — to Bank Danamon. By way of comparison, Gupta points out that DBS Indonesia, a far smaller bank than Danamon, makes about S$75 million from treasury customer flows.
Over time, Gupta had seen potential to build up Bank Danamon to a corporate bank, and introduce cash management, as well as affluent banking. The micro-finance lender primarily operates in the mass-market and small-to-medium enterprise sector but its 500 branches offer DBS a platform to expand among corporate clients in Indonesia.
For Danamon, it will need to continue growing its business in Indonesia without for now — turbo-charging its business via an acquisition.
“We are positive about Indonesia’s long term potential, and will continue to grow our DBS Indonesia franchise, while remaining open to opportunities as they arise,” said Gupta in the statement on Wednesday.
