Woori Finance: MBK Partners in talks with Canada Pension Plan Investment Board for potential investment

MBK, a suitor in the sale of Woori Finance, is in talks with Canada Pension Plan Investment Board (CPPIB), to get the latter onboard as a financial investor in the potential deal, reported the Chosun Ilbo. The report cited an unspecified pension fund source for the information. The source told the paper that David Denison, the president and CEO of CPPIB, is currently in South Korea to attend the International Pension Conference. The potential investment could be decided during the visit, the source was cited as saying.

As reported, MBK Partners has submitted letters of intent to acquire a controlling stake in Woori Finance, which has a market capitalisation of KRW 11trn (USD 10.3bn).

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To say you "know" Asia FIG M&A, you really must know a little something about two recent massive Korean banking M&A deals. The sale of Korea Exchange Bank by private equity fund Lone Star to Hana Financial is one. This pending sale of a 57% stake in Woori Financial Holdings is another. MBK had already been linked to a potential deal for a long time, but what is new about this rumour is the name Canada Pension Plan ("CPP"). Here, I should mention that I have certain affiliations with Canada, and indeed I have friends who work at CPP right now.

In this post I will cover the corporate profile of CPP, a history of the deal the Woori Financial opportunity, and my thoughts on future outcome.

Corporate Profile of CPP
The Canada Pension Fund Investment Board is exactly as its name suggests - it manages a large fund of money that is used to pay pension benefits to Canadian citizens. The fund size is approximately USD150bn, which is huge. For comparison, it is around the same size as Temasek of Singapore. Here are two charts which are quite informative but does not help to confirm anything:

All I can tell from this is 1) CPP is very willing to invest in equities now as compared to 10 years ago and 2) public equities makes up almost 40% of their portfolio, making Woori Financial stock "in mandate".

Last point to mention on CPP is that, man, these guys do A LOT of deals! Scrolling through their news releases, we see that they do a deal almost every 2 weeks! There does not seem to be any particular focus either - 1) some investments done in a consortium with other investors and some alone; 2) Investments have been done across various geographies; 3) Investment sizes range from USD200mn to USD2bn. One thing to notice though, is that there do not seem to be many precedents of them acquiring stakes above 50%.

History of Woori Financial opportunity
Woori Financial Group is listed both on the Korea Stock Exchange and the NYSE, with a current market cap of approximately USD10.5bn. In 1997 during the Asia financial crisis, the government rescued it with taxpayer money, and as of currently maintains an approx. 57% stake in the group. Based on market cap, the stake is valued at around USD6bn. A quick summary of key events:

- The government first toyed with the idea of selling its holding in late 2010, but this was eventually held off due to poor market conditions.
- Then in early 2011, Hana Financial, a strong potential suitor for Woori, acquired KEB from Lone Star instead.
- Similarly, an employee-led group of Woori looking to acquire the Government's stake walked away due to disagreements on price. The group wanted to acquire the stake in small blocks at a minimal premium to market price, whereas the Government expected a management control premium on its block stake.
- Korea Development Bank was interested in the deal, but public criticsm prevented a deal from happening on the grounds that KDB was another government owned bank, so it would not be a true privatization process.
- Most recent rumoured interested buyers are KB Financial, MBK Partners, Vogo Fund and TStone Corp.

Also important to the deal are the 3 stated objectives of the Government in selling down the stake:
1) Maximization of public funds
2) Smooth and rapid privatization
3) Development of the Korean banking industry

Final Commentary
In my opinion there are 3 types of buyers for Woori:

1) Private equity funds: I think this is a possible outcome, however, a USD6bn price tag is typically too large for an average hedge fund. This ties back to today's rumour piece where MBK is said to have solicited CPP to form a consortium. There are also some additional issues for private equity funds, such as government aversion to private equity profit taking (as in the Lone Star / KEB case).

2) Foreign banks: No deal. Neither Citi nor Standard Chartered could make it work, it seems highly unlikely anyone would still want to try. Last I heard (a few days ago) there were massive union strikes at the SC First Bank building which crippled over 50% of Standard Chartered's Korean operations. Maybe HSBC would like to try (they did try to bid for KEB before) but I doubt it.

3) Domestic banks: Selling to a local bank would encourage healthy industry consolidation. However, with KDB has been ruled out and Hana having already done a large acquisition, there seems few remaining financial institutions with the appetite for a USD6bn deal. I can only think of 2 other names - KB Financial and Shinhan Financial. My view is that the sale process will be long and drawn out, but ultimately one of those two will end up being the acquiror. Probably KB Financial.

Actually there is a 4th possibility - the acquiror can be a non-bank company, or even non-financial services. But I don't have sufficient insight on this, and it seems unlikely that such a company would put itself at risk by buying one of the largest banking institutions in Korea without prior banking experience. I wouldn't rule it out though, particularly for some nation-wide conglomerates, like Samsung or Hyundai or SKTelecom or something.

BIDV Insurance seeks advisor to find strategic investor

BIDV Insurance Corporation (BIC) is looking for a financial advisor to help find a strategic investor, Chairman Pham Quang Tung said.

The Vietnam-based company needs a competent and experienced advisor to handle the strategic partnership plan, Tung said. It has received interest from several investors and is now exchanging information. It is also planning to sell shares on the stock market this year.

Under the current regulations, BIC can sell up to a 20% stake to a strategic partner, Tung said. However, it could seek regulatory approval later to increase the investment limit to more than 20% as other companies have done in the past, the chairman added.

The insurer is seeking an overseas strategic partner with a global perspective to help it improve competitiveness and increase presence in the international and domestic insurance markets.

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When investment banks see a piece of news like this they generally have one of two possible reactions:
1) This is such a small deal, we got way better deals in the pipeline, screw this; or
2) GUYS GUYS, these guys are calling out for advisors! Let's get all over it RIGHT AWAY.

I'll also let you guys in on another secret. It is not insider information type secret but it is a secret nonetheless because you probably don't know it. And it is only by giving you information that you don't already know that I have any hope of keeping you coming back to this blog for more every day. Here goes: BIDV Insurance intends to issue new shares in the near future.

What does this mean for the investment bank? Well. It means that if they successfully help BIDV Insurance find a global strategic pre-share issue investor, they will quite likely be mandated again for the share issue in one role or another. Let's run some quick numbers:

In 2009, BIDV Insurance had a net profit of approximately USD4mn. Assuming a P/E of 12.5x (fair ratio relative to insurance companies in the Asia Pacific region), its implied equity value is USD50m. Which means for the investment bank, the indicative revenue generation is as follows:

1) Strategic investor placement of 20% stake (worth approx. USD10m) will generate approximately 1% advisory fee, which is USD100,000.
2) New share issue to raise proceeds of USD15m (approx. 30% of company) will generate approximately 5% IPO fee (the IPO fee is highly debatable, but 5% is reasonable), which is USD750,000. Your investment bank probably won't get all of this because there will likely be a syndicate, so let's assume you get a little more than half, which is USD400,000.

That totals approximately USD500,000 in revenues. Actually I must say I am rather disappointed at the low advisory revenue figure, but I suppose it should be expected given that the whole company is only worth around USD50mn anyway. Bottom line though, USD500,000 of revenues is not so bad for 2-3 months work on a small deal.

I am going to stop here for today because there is no doubt in my mind that there will be further developments on this in the near future. I will write about the company and the deal in more detail then.

DONE DEAL: J Trust to acquire 64.16% stake in Kyungeun Mutual Savings & Finance

J Trust, the listed Japan-based financial services company, announced today that it will acquire a 64.16% stake in South Korea-based Kyungeun Mutual Savings & Finance.


J Trust said that it would spend JPY KRW 25bn (USD 23.6m), or 5m shares at KRW 5,000 per share, to acquire a 64.16% stake in Kyungeun Mutual Savings & Finance during August 2011, once the planned deal is approved by South Korean authorities.

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We covered this deal on July 5th - it is now done and announced!

Bank Muamalat majority stake draws interest from Saratoga Capital

Saratoga Capital, the Indonesian investment company, is one of the bidders to acquire a majority stake in Bank Muamalat Indonesia (BMI), the largest Islamic bank in the country, the online edition of Bisnis Indonesia reported.

The news report cited Bank Indonesia director Mulya Siregar as saying that Saratoga is one of the eight bidders that entered the second bidding process for a majority stake in BMI.

The online newspaper could not get any confirmation from either BMI or Saratoga on the issue.

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On the topic of Takaful banking (see last post), today let's take a look at another Takaful banking entity that is "in play" in the Asia M&A world. The intelligence cited above is just one of many, many rumours surrounding this bank, and other suitors for a majority stake in Bank Muamalat have included Standard Chartered, OCBC, Para Group and Barings.

In this post I will give you a brief summary of the corporate profile of Muamalat Bank, a summary of what has happened until now, and my thoughts on how the situation will play out.

The first thing you should be aware of is that  Bank Muamalat Syariah, which is the one we're talking about, is not the same as Bank Muamalat Malaysia Berhad, which is obviously in Malaysia rather than Indonesia.

Corporate Profile & History

Established in 1991, Bank Muamalat is a leading Takaful bank in Indonesia with approx. 275 branches, 32,000 ATMs nation-wide. Interestingly, it also has an alliance with post offices across Indonesia, whereby customers can conduct transactions with the bank at over 4,000 post offices across the country. This is a value-adding feature of the business, as any strategic acquiror would be interested in acquiring such a vast distribution network.

In 1998 during the Asia financial crisis, it was hit with a large number of bad loans, and it's non-performing loan ratio was at one point as high as 60%!

Point of information: Non-performing loans ("NPL") is a measure of a bank's loans that are in default or are close to default. A 60% NPL ratio essentially means that if you had lent out $100 of principal, $60 of it has disappeared and will never be returned to you.

At this point, what usually happens is the company cries for help (aka. solicits a strategic investor), and a shark investor (usually in the form of a PE fund or another bank looking for a strategic acquisition) will come in, inject a certain sum of capital into the business, and in return take a chunk of equity stake in the company. For Bank Muamalat, this shark investor was the Islamic Development Bank, who still holds an approx. 33% stake today. Some readers have suggested that there is too much text in this blog, and some fancy graphs and pictures are needed, so here you go:

It is presented in my company colours too, so this is what our clients will see if we were to present it to them. This is not important to the deal, but using company colours is of utmost importance to the Analyst.

As you can see, there are 3 major shareholders of the bank. In general, this is a warning flag that any M&A will likely be a headache, because if any one of the 3 major shareholders disagree to the plans, there will be many steps they can take to stall or otherwise block a potential transaction.

The Islamic Development Bank is an international financial institution established in 1975 for the purpose of fostering economic growth and development in Muslim countries and communities. Their intentions to sell are uncertain, but I have read rumours that it may be with regards to potential regulatory changes which will limit their overseas investments. Boubyan Bank is a bank in Kuwait, it is understood that they may be willing to sell their stake given a strategic intention to divest overseas assets to focus on domestic growth.

Analysis & Views:

Price: The rumoured price tag on this deal is USD600m (for 100% stake), and this is immediately a problem for me. For the year ended 2010, Muamalat Bank made USD20m in profits and had total equity of USD206m. This means that at a USD600m price tag, the implied transaction multiples are 30x P/E and 3x P/B! This is too much! There will likely be an issue around pricing which could potentially be mitigated after Muamalat Bank publishes its indicative (or actual) first half operating results of 2011. If operations have significantly improved, the implied transaction multiples will be more in line with industry expectations and precedent transactions.

Asset Quality: The bank's loan portfolio quality is still poor, with NPL ratio in the 4-5% range. What this really means is that if you lent out $100, around $5 will default and you will lose that money. In order for the bank as whole to make any profits from its interest income, the interest margins received on loans extended with the remaining $95 must exceed $5, or 5.3% (5 divided by 95). In either case, profitability is an issue. Furthermore, a potential acquiror may have to look at the whole loan book of Muamalat Bank and conducts its own analysis on asset quality, leading to potential further write-downs of its loan book, which equates to an immediate loss of earnings in the first year of acquisition. Nobody likes this.

Regulations: Indonesia has announced plans to limit bank ownership to less to a 50% per shareholder to improve governance in the banking industry. Putting aside the economic and social merits of this, foreign strategic investors will hate this. If I'm buying a house, I don't want to be limited to just owning 49% of it. I want to own the whole house so that I can live in it! Other single presence rules (let's talk about this one another time) will also affect the how potentially actionable the deal is.

Final Commentary: What will happen now?

I have obviously only covered a small number of points. I feel obligated to say that in every post I make because as you can well imagine, M&A deals are complex, and there are always a large number of issues to consider, way beyond what I can type in a page or analyse in half an hour.

What I believe will happen to this deal is that it is unlikely a sale will occur within 2011. Potential acquirors will be following their further financial disclosures closely, and reconsider interest if they can show improvement to their operating metrics.

Further, banking regulation in the country will play a large role in this. Strategic investors (such as Standard Chartered, OCBC) are probably not interested in holding a minority stake, and any restrictions on foreign bank ownership of domestic banks will likely be a deal breaker. Private equity funds may be a little more flexible to this respect, but probably much less so with respect to price. Either way, I don't see this deal happening this year. Maybe next year...

Takaful Ikhlas: Allianz Malaysia and MNRB agree to end acquisition talks

The listed financial group, Allianz Malaysia and MNRB, the listed Malaysian general reinsurance firm, has ended negotiations to acquire Takaful Ikhlas, the Malaysian Islamic insurance company, according to a stock exchange announcement.


We refer to our announcement made on 20 December 2010 in respect of the commencement of negotiations with MNRB Holdings Berhad (“MNRB”) on the proposed acquisition of equity interest in Takaful Ikhlas Sdn. Bhd. by the Company (“Negotiation”) and the updates in respect thereto as reported in the Quarterly Report of the Company for the financial period ended 31 March 2011.


We wish to announce that AMB and MNRB have mutually agreed to end the Negotiation.

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There were other interesting pieces of news on Bank Mutiara in Indonesia and local Japanese banks which I wanted to do some desktop analysis on, but I chose this piece instead because, well, acquisition talks have ended so if I don't talk about it today I will never get to talk about it again.

1. Takaful Ihlas
To begin talking about this company, it's probably useful to give you all a 101 on what "Takaful" means. Some of you may be more familiar with the term "Islamic Banking", but in this part of the world we insist on calling it "Takaful", much like how the French insist on calling their sparkling wine "Champagne".

In the laws of the Islamic religion, or "Shariah", the payment and acceptance of what is known to us as "interest" is forbidden. My further understanding is that Muslims can only be paid for the work, and not simply for extending the use of money. As can be imagined, this creates a big problem for their banking system, as nobody would be allowed to have mortgages or personal loans or credit cards etc.

Takaful banking is a magic trick that transforms such transactions into "allowable" transactions under Shariah (and only the top banking magicians know how to do this). Thus Takaful banking is very quickly growing in popularity due to the large population of Muslims across the world, which also explains why Takaful Ihlas is a sought after acquisition target.

Takaful Ihlas is a life and general insurance company in Malaysia, wholly owned by MNRB Holdings, which provides Takaful insurance products for individuals and commercial enterprises. It was established in 2002 and primarily distributes its insurance products through trained agents across the country.

2. MNRB & Allianz
Allianz is a global financial services company based in Germany, and since it outside of Asia and frankly quite a household name, I won't spend any time on it.

MNRB Holdings is, as its name suggests, a holding company. It operates through its subsidiaries primarily in insurance, reinsurance, takaful and retakaful businesses. You're probably thinking...woah hold on, retakaful?? There's more magic in banking than a Harry Potter novel! Bottom line is, writing Harry Potter books can be very profitable, and so can Takaful banking.

Based on reader feedback on this blog, it seems that I should spend a little more time describing finance fundamentals, and since I genuinely appreciate all your comments that is what I will do.

Just now I mentioned reinsurance (and subsequently retakaful) - I will try to explain this. Insurance companies underwrite insurance policies and take on risk. For example in a health insurance policy, you pay a certain premium to the insurance company every month, but if you get sick, they will pay your doctor's bill. Thus, insurance companies take on the "risk" of you getting sick. Sometimes, after some lengthy number crunching and actuarial science calculation process, they will decide that they have taken on too much risk, so what can they do to de-risk? This is where reinsurance companies come in - insurance companies can transfer their excess risk to reinsurance companies, who will then charge them a fee. Fundamentally, reinsurance companies exist as a risk management process for insurance companies.

I hope that is clear, although at the same time it leaves me very little space to discuss much more.

Final Commentary: Why did the acquisition talks break off?
From an outsider perspective, (I am not an insider to the deal, and if I was I wouldn't be sharing any inside information anyway...) there seems to be 3 likely reasons in my opinion.

The first is price - Takaful Ihlas had a net profit of approx MYR9.5mn (USD3.2mn) in 2010, which corresponds to an ROE of approx. 4.8%. For a company which is low in profitability, but in a perceived high growth market, it is always the tendency of the seller to value themselves based on an aggressive growth factor. On the other hand, the buyer will usually take a more prudent approach to value the company in its current condition. This will usually thus create a pricing expectation gap which is difficult to close.

The second is management control - my understanding of the deal is that Allianz would not be acquiring the entire 100% stake in Takaful Ihlas. So how much they will buy, the corporate governance of the company post deal will be a major debating point.

The third is post-deal arrangements - both Allianz and MNRB are insurance companies. Subsequent to the deal, how will their businesses be arranged in order not to cannabilize each other? How would the entities be properly incentivized in order to make this a value adding deal? This will always be difficult.

That's it for today, goodnight everyone.

P.S. I am not looking forward to a long day at work tomorrow...