Mitsubishi UFJ wholly-owned subsidiary Bank of Tokyo-Mitsubishi UFJ (BTMU) will make a cash tender offer to shareholders of UnionBanCal (UNBC) at a price of $73.50 per share in cash. The tender offer will be launched by August 29. Morgan Stanley is MUFG's and BTMU's financial advisor with Sullivan & Cromwell and Mori Hamada & Matsumoto providing legal advice.
The tender offer is not subject to a financing condition and does not require Japanese or US bank regulatory or antitrust approval. UNBC will continue to be headquartered in San Francisco after the deal.
The joint announcement by the two parties marks closure to MUFJ's recent attempts to acquire 100% of UNBC. On April 26 MUFG offered $58 per share which UNBC's board rejected on June 22 saying it did not reflect the fair value of the firm. UNBC then provided MUFG with financial forecasts to back this up. MUFG came back on August 12 with an improved offer of $63 per share which also did not find favour and now finally the offer of $73.50 per share has won over UNBC.
ôThe premium may look high to the current stock price, but itÆs not compared to the price the stock was trading at before the subprime crisis,ö says one banking source.
MUFG has owned a majority of UNBC since 1996 and currently own 65.4% of the California-headquartered bank. The transaction values 100% of UNBC's equity at $10.1 billion and values UNBC at about 2.3 times book. UNBC traded down to a 52-week low of $35 in July when it seemed a deal may not be in sight and MUFG's offer price represents a premium of 110% to this price.
Analysts have commented the price is high but justifiable given that MUFG has a high level of familiarity with UNBC and UNBC has not been plagued by subprime woes.
In any case, even at the higher price, MUFG can easily afford the transaction, according to a Nikko Citi report, which states that ôMUFG will not need to raise capitalà the deal will not cause dilution and we estimate a positive EPS impact.ö
Ratings agency Fitch agrees with the Nikko Citi assessment as it affirmed BTMU's ratings yesterday saying: "the financial impact of the transaction is limited to the deduction from capital of the cash payout".
Deutsche Securities bank analyst Shin Tamura says that the MUFGÆs actions with regard to UNBC are motivated by a number of concerns. Firstly, there is some risk that UNBC, a regional, retail-oriented bank, many be hit by the woes enveloping the broader US economy. UNBC is exposed to the small business and prime mortgage market, and both could be affected by the general decline in the US economy. ôIf MUFG want to quickly inject capital, itÆs much easier to do it if UNBC is a 100% subsidiary,ö he says.
Secondly, increasing ownership to 100% in UNBC is part of a strategy that MUFG has been carrying out with many others of its other subsidiaries in Japan. ôSuch a strategy is far easier than hostile M&A, yet it pumps up the top line and shareholder returns, plus it enables the bank to puts its capital to work in an efficient way,ö he adds.
Finally, although UNBC is clearly not an acquisition vehicle for the large scale, blue-chip, corporate business which is MUFGÆs top priority, it provides an alternative. ôBuying an investment banking entity to service Japanese companies in the US is the priority. But failing that, buying some retail banking businesses is an option. A privatised UNBC could act as a regional expansion vehicle,ö he says.
MUFG is one of the world's leading financial groups, with total assets of more than Ñ190 trillion ($1.8 trillion) as of March 31, 2008. MUFG's services include commercial banking, trust banking, securities, credit cards, consumer finance, asset management and leasing. BTMU is Japan's largest commercial bank with around 660 branches and offices, over 400,000 corporate customers, and around 40 million individual customers. It also has the largest overseas network of any Japanese bank, present in more than 40 countries worldwide.
UNBC is a bank holding company with assets of $60.6 billion at June 30, 2008. Its principal subsidiary, Union Bank of California had 337 banking offices in California, Oregon, and Washington and 2 international offices.
As expected, UNBC traded up towards the offer price, gaining 12% on the NYSE to close at $73.18 on Monday and gained further to close at $73.35 yesterday. MUFG lost 1.9% on the Tokyo Stock Exchange yesterday to close at Ñ829.
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