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.
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...
Hey nice blog~ I've been reading through your posts and there's some really well thought-out pieces...keep it up man I've placed this blog on my daily reading list.
ReplyDeleteNice point mentioned on the value-adding feature of the strategic partnership of the post offices and the banks, didn't know that before!
Agree with the murkiness on the M&A deal. Some food for thought...companies attract capital through internal savings, bank loans, bond issuance, IPO offerings, or I guess M&A strategic investors. Excluding internal savings, all of the above attractions require the company to be in good shape (i.e. good margins, low NPL ratios, good risk governance etc), hence base on a so-so operating performance, the deal should only be realized if any outside investors see any hidden gems within it...
Thanks for your support!
ReplyDeleteI fully agree with you on the "hidden gems" comment, however, I just want to add that quite often a company's value does not have to come from its operating performance. Just to give an example:
If country X no longer issues any new banking licenses in an attempt to force industry consolidation, it's possible that the only entry method into the market for a foreign investor is through M&A. In such cases, there may be value in a poorly operated local bank simply for the fact that it holds a domestic banking license.