Philequity Corner (05/30/05)
The Hunter becomes the hunted
By Ignacio B. Gimenez
In 1999, Equitable Bank acquired PCI Bank, starting a mergers and acquisitions (M&A) frenzy which led
the country’s top banks BPI and Metrobank on the hunt for other banks in a bid to maintain their ranking.
With the help of the government pension funds GSIS and SSS, Equitable Bank acquired 72% of PCI Bank
and eventually merged to form Equitable-PCI Bank (EPCI), making it the country’s second largest bank (in
terms of asset size) and pushing erstwhile No. 2 BPI down one rung.
Several months later, BPI together with its parent Ayala Corp. and DBS Bank of Singapore acquired Far
East Bank. BPI and Far East Bank then merged to become the biggest Philippine bank – overtaking
erstwhile leader Metrobank. Left with much smaller banks as possible targets, Metrobank acquired and
merged with several banks (Solid Bank, Global Bank, Philippine Banking Corp. and Asian Bank) to regain
its No. 1 ranking.
This was the time when we saw prices of most listed banks double or even triple for some cases. In the case
of Equitable Bank, the price per share went from P58.50 in Jan. 1999 to a high of P113 at its peak in May.
We, in Philequity Fund, were able to anticipate many of these M&A plays, enabling the fund’s
shareholders to greatly benefit from these takeovers.
Fast forward to 2005, the table has been turned, the hunter (i.e. EPCI Bank) now becomes the hunted.
Recently, Henry Sy’s Banco de Oro (BDO) offered to buy 10% of EPCI Bank shares held as treasury stock
at P43.50 per share or at a 10% premium to market, whichever is higher. As early as 2003, BDO has
shown its interest in EPCI by securing a memorandum of agreement with the SSS to buy the latter’s 26%
stake in EPCI at P43.50 per share. The move has since been blocked claiming that any sale of government
assets should be thru a public bidding and not thru a negotiated sale. The case is currently pending with the
Supreme Court.
Meanwhile, EPCI’s controlling shareholder - the Go family – is trying to sell the treasury shares held in
100% owned subsidiary EBC Investments to a friendlier party (John Gokongwei ??, or to parties related to
the family ??). This move is aimed to make it harder for BDO to gain a controlling stake even if BDO gets
the shareholdings of SSS in EPCI. Note that if we add the 10% shares held in treasury plus the 24%
already held by the Go family, the combined shareholdings effectively creates a veto block.
Top Shareholders of Equitable-PCI Bank
Public
20%
Go family
24%
Sy Group
1%
Trans Middle
East
7%
EBC Inv
10%
GSIS
12%
SSS
26%
Source: Phil. Stock Exchange & PEMI estimates
New Predator on the prowl
BDO is a predator on the prowl and has been aggressively building up branch network and asset base thru
M&A. It started the ball rolling early by buying other bank’s deposit liabilities and branches in the past
few years. It merged with Dao Heng Phils. in 2001, acquired 57 branches and deposits in First E-Bank in
2002, and acquired Banco Santander Phils and Santander Investment Securities Phils. in 2003. It recently
purchased 66 branches (with P11bn in deposits) of United Overseas Bank for P600m.
If BDO succeeds in getting its foot in EPCI thru the acquisition of the treasury stock or an eventual sale of
SSS’ stake, then we expect to see the same M&A frenzy which characterized the industry back in 1999.
For quite some time now, people have been talking about the possibility of a three-way BDO-EPCI-China
Bank merger which could overtake Metrobank in the No. 1 slot. (see table below).
Banking Sector Ranking in terms of asset size (excl. foreign and development banks)
Rank
Metrobank
BPI
EPCI Bank
PNB
Banco de Oro
RCBC
Allied Bank
China Bank
UCPB
Union Bank
Security Bank
PB Com
Bank of Comm
Prudential Bank
IBank
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
Assets
(Pbn)
470.6
394.8
293.5
220.2
169.8
152.2
118.5
116.4
104.9
100.3
82.7
58.5
57.6
54.3
51.6
Rank
1
2
3
5
6
4
8
7
9
10
11
19
13
14
12
Loans Rank
(Pbn)
242.7
1
162.2
2
134.2
3
78.4
4
69.9
5
83.2
6
47.2
7
50.8
8
46.5
9
39.1
10
38.2
11
10.9
17
22.2
12
15.2
13
24.0
14
Deposits Rank
(Pbn)
345.7
2
314.7
1
189.6
3
163.5
4
121.4
6
108.2
8
92.7
9
85.5
5
79.4
17
56.6
7
51.7
10
33.0
12
41.6
19
40.5
11
39.4
13
Capital
(Pbn)
53.4
55.0
44.4
24.0
19.6
16.2
15.4
20.2
4.1
16.6
10.8
6.7
3.8
7.4
5.8
Source: Bangko Sentral ng Pilipinas (Dec. 2004)
With all these talks of further consolidation in the banking sector, we have short-listed possible groups
which we believe have the financial capacity, the expertise and the interest to be involved in possible
mergers /or acquisitions. The list includes:
1) Henry Sy Group – The Sy Group’s flagship bank Banco de Oro has been eyeing EPCI since late
2003 thru the acquisition of SSS’ 26% stake but has since been blocked with a case pending in the
Supreme Court. BDO recently announced its bid to acquire the 10% EPCI stake held as treasury
stock. The Sy Group also controls China Bank.
2) John Gokongwei Group – Gokongwei has been absent in the banking scene since he sold JG
Summit’s stakes in Far East Bank (sold at 2.3x BV) and PCI Bank (sold at 1.8x BV) in 1999 for a
handsome profit. The group is said to be eyeing back a stake in Equitable-PCI Bank, which
reportedly has the backing of controlling shareholder, the Go family.
3) Ayala Group – The Ayala Group’s Bank of Phil. Islands is the No. 2 bank in terms of asset size.
BPI has a lot of experience in M&A deals with the acquisition of Far East Bank in 1999 and
Citytrust Banking Corp. way back in 1996. More than capitalized for its own need, BPI has openly
expressed its interest to acquire other banks, not only in the Philippines, but even in other parts of
the region. Last year, talks to acquire 20% of Bank NISP in Indonesia failed when BPI was
refused management control.
4) George Ty Group – The Ty family has long held the No. 1 position in Philippine banking thru
Metrobank. Incidentally, Metrobank has been planning a rights offering this year to clean up its
balance sheet and prepare the bank for possible acquisitions down the road.
5) Lucio Tan Group – Lucio Tan controls Allied Bank and owns 33.5% stake in Philippine National
Bank (PNB). The government, which also owns 33.5% of the bank, recently announced a joint
sale with Lucio Tan for a combined 67% stake in the bank. Lucio Tan holds the right to match the
bid if he wishes to. A merger between Allied Bank and PNB will always be a strong possibility.
Meanwhile, we also cannot discount the possibility of well-run, profitable mid-sized banks (such as Union
Bank, Security Bank and IBank) acquiring other banks.
Aside from EPCI and PNB, another possible target is United Coconut Planters Bank (UCPB), which went
into receivership last year and which the government is also trying to dispose. Other banks reportedly up
for sale or have been targets for acquisition include Export and Industry Bank and Prudential Bank.
The current speculation brewing in the market is that the Sy and Gokongwei camps may be drawn into a
bidding war for the EPCI treasury shares. Note that previously, the Sy camp only bid for P43.50 per share
for SSS’ 26% stake in EPCI. Now, they are offering P43.50 per share or a 10% premium over the
weighted average share price over a mutually agreed time period, whichever is higher – meaning they are
now willing to pay for a higher price for it.
Also note that when Gokongwei sold his stake in PCI Bank, he got a price of P290 per share while other
shareholders were offered a share swap of three (3) Equitable Bank shares for every one (1) PCI Bank
shares. This effectively puts the price of Equitable Bank at the time of the swap at P96.67. So, while
Gokongwei seems to be prudent enough not to be lured into a bidding war, it is also important to keep in
mind that the current price of EPCI at P49.50 is only half of his selling price when he sold his stake in
1999. Meanwhile, EPCI’s asset size has already tripled from around P100bn back in 1998 to
approximately P300bn now.
If a bidding war does happen, then we may once again see the kind of M&A frenzy we had back in 1999.
It will result not only in BDO and Gokongwei fighting for EPCI but also the current top 2 banks, namely
Metrobank and BPI, again scrambling to maintain its leadership position.
With regard to the market, Philequity Fund’s top sector picks are banking and property. We also expect the
market to continue trading in a consolidation phase in the absence of fresh news, as we have mentioned in
previous articles. However, if this banking M&A indeed pushes through, we in Philequity Fund see this as
the potential catalyst that the market needs to be able to break out of this long consolidation.
Philippine Banking and Financial Index (1998 to 2005)
Source: Technistock
For comments and inquiries, you can email us at info@philequity.net or gime10000@yahoo.com .