Pan-Asia Catalysts/Events, Quiddity Advisors

David Blennerhassett

Pan-Asia Catalysts/Events

Quiddity Advisors

Equity Bottom-Up

Back on the 4 March, <a href="https://www.smartkarma.com/entities/bank-of-east-asia-ltd" target="_blank" data-smartkarma-citation="entities:341:1" rel="noopener">Bank of East Asia (23 HK)</a> <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2020/0304/2020030400035.pdf" target="_blank" rel="noopener">announced</a> a strategic review of its portfolio. The review was supported by Elliott Management, and was viewed as a tentative truce between the two ahead of an expected court date to arbitrate BEA's alleged relationship with two of its key shareholders, Japan’s <a href="https://www.smartkarma.com/entities/sumitomo-mitsui-financial-gr" target="_blank" data-smartkarma-citation="entities:217:1" rel="noopener">Sumitomo Mitsui Financial (8316 JP)</a> and Spain’s <a href="https://www.smartkarma.com/entities/caixabank-sa" target="_blank" data-smartkarma-citation="entities:21255:1" rel="noopener">CaixaBank SA (CABK SM)</a>. I discussed this development in <a href="https://skr.ma/f3hfy" target="_blank" rel="noopener">Elliott &amp; BEA: "Fiefdom" On Pause</a>.
Fast forward six and half months and BEA has <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2020/0923/2020092300183.pdf" target="_blank" rel="noopener">decided</a> to initiate a "sale process for BEA Life Limited (“BEA Life”) in order to enhance the value of the Bank’s business, improve its financial position and enable its management team to focus on its core banking operations in Hong Kong and Mainland China".  The announcement was supported by Elliott.
BEA added that it would seek to enter into a "long-term exclusive distribution agreement that will provide an ongoing source of revenue for BEA as a distributor of insurance products through its banking platform."
Reportedly BEA could raise US$500mn-US$600mn from the sale, which is roughly in line with the gross written premiums of HK$4.8bn in 2019; and ~5.5x the net insurance premium of HK$826mn in FY19. 
BEA said it would further identify opportunities to grow its core businesses   - presumably this already formed part of its forward roadmap. 
But does the sale and formation of a so-called bancassurance partnership, make BEA a more attractive company (as a standalone or takeover target); or a less attractive bank as it focuses on is pedestrian traditional banking ops? Or is this simply, just the opening salvo from its ongoing strategy?
As always, more below the fold.

Back on the 4 March, Bank of East Asia (23 HK) announced a strategic review of its portfolio. The review was supported by Elliott Management, and was viewed as a tentative truce between the two ahead of an expected court date to arbitrate BEA's alleged relationship with two of its key shareholders, Japan’s Sumitomo Mitsui Financial (8316 JP) and Spain’s CaixaBank SA (CABK SM). I discussed this development in Elliott &amp; BEA: "Fiefdom" On Pause.
Fast forward six and half months and BEA has decided to initiate a "sale process for BEA Life Limited (“BEA Life”) in order to enhance the value of the Bank’s business, improve its financial position and enable its management team to focus on its core banking operations in Hong Kong and Mainland China".  The announcement was supported by Elliott.
BEA added that it would seek to enter into a "long-term exclusive distribution agreement that will provide an ongoing source of revenue for BEA as a distributor of insurance products through its banking platform."
Reportedly BEA could raise US$500mn-US$600mn from the sale, which is roughly in line with the gross written premiums of HK$4.8bn in 2019; and ~5.5x the net insurance premium of HK$826mn in FY19. 
BEA said it would further identify opportunities to grow its core businesses   - presumably this already formed part of its forward roadmap. 
But does the sale and formation of a so-called bancassurance partnership, make BEA a more attractive company (as a standalone or takeover target); or a less attractive bank as it focuses on is pedestrian traditional banking ops? Or is this simply, just the opening salvo from its ongoing strategy?
As always, more below the fold.

BEA (23 HK): Big Banc Theory And Elliott's Hard Slog

European Event-Driven Analyst

Jesus Rodriguez Aguilar

Event-Driven

The Boards of both <a href="https://www.smartkarma.com/entities/bankia-sa" target="_blank" data-smartkarma-citation="entities:21252:1" rel="noopener">Bankia SA (BKIA SM)</a> and <a href="https://www.smartkarma.com/entities/caixabank-sa" target="_blank" data-smartkarma-citation="entities:21255:1" rel="noopener">CaixaBank SA (CABK SM)</a> have approved the merger (in fact, the takeover of Bankia by CaixaBank) of both entities to create the biggest domestic bank in Spain.
<ul>
<li>target synergies of EUR 770 mn per year, and EUR 290 mn in extra turnover over the next five years (above my conservative scenario), target RoTE of 8% and efficiency ratio of 47.9%.</li>
</ul>
The exchange ratio has been bang-on the one mentioned in previous insights:
<ul>
<li>Actual 0.6845 shares of Caixabank per Bankia share (vs. the 0.68 mentioned using the implied exchange rates by 9) September).</li>
<li>No rights issue.</li>
</ul>
Recommendation: this merger will close and I recommend setting up the spread long 1 share of Bankia / shorting 0.6845 shares of CaixaBank (the gross spread is 1.6% as I write).
Considering the likely synergies could mean up to nearly 20% in the case of CaixaBank and c. 15% in the case of Bankia. On these grounds, both could be "long only" investment recommendations.
Read across: this merger will put pressure in smaller Spanish lenders, such as <a href="https://www.smartkarma.com/entities/liberbank-sa" target="_blank" data-smartkarma-citation="entities:21279:1" rel="noopener">Liberbank SA (LBK SM)</a> , <a href="https://www.smartkarma.com/entities/unicaja-banco-sa" target="_blank" data-smartkarma-citation="entities:28379:1" rel="noopener">Unicaja Banco SA (UNI SM)</a> , both currently solidly capitalised but barely profitable, and <a href="https://www.smartkarma.com/entities/banco-de-sabadell-sa" target="_blank" data-smartkarma-citation="entities:21295:1" rel="noopener">Banco De Sabadell Sa (SAB SM)</a> with its coveted position in Spanish SMEs. All three are the main candidates in any forthcoming corporate activity, with Liberbank as the main takeover target.

The Boards of both Bankia SA (BKIA SM) and CaixaBank SA (CABK SM) have approved the merger (in fact, the takeover of Bankia by CaixaBank) of both entities to create the biggest domestic bank in Spain.

target synergies of EUR 770 mn per year, and EUR 290 mn in extra turnover over the next five years (above my conservative scenario), target RoTE of 8% and efficiency ratio of 47.9%.

The exchange ratio has been bang-on the one mentioned in previous insights:

Actual 0.6845 shares of Caixabank per Bankia share (vs. the 0.68 mentioned using the implied exchange rates by 9) September).
No rights issue.

Recommendation: this merger will close and I recommend setting up the spread long 1 share of Bankia / shorting 0.6845 shares of CaixaBank (the gross spread is 1.6% as I write).
Considering the likely synergies could mean up to nearly 20% in the case of CaixaBank and c. 15% in the case of Bankia. On these grounds, both could be "long only" investment recommendations.
Read across: this merger will put pressure in smaller Spanish lenders, such as Liberbank SA (LBK SM) , Unicaja Banco SA (UNI SM) , both currently solidly capitalised but barely profitable, and Banco De Sabadell Sa (SAB SM) with its coveted position in Spanish SMEs. All three are the main candidates in any forthcoming corporate activity, with Liberbank as the main takeover target.

CaixaBank - Bankia: Definitive Agreement and Exchange Ratio

Financials & FinTech research, Galliano’s Financials Research

Victor Galliano

Financials & FinTech research

Financials & FinTech, EM & Developed Markets

Galliano’s Financials Research

Galliano's Financials Research provides fundamental research in Emerging Markets financials, including FinTech, as well as financials in select Developed Markets.

The investment style applied is generally value oriented, although Growth At Reasonable Price (GARP) strategies can also be used where appropriate. 

Our investment research approach aim is often contrarian, looking to capitalise on overly sceptical or optimistic consensus views. In terms of valuation techniques, the focus is on PBV ratio to ROE, PE multiples and dividend yield, as well as the application of PEG ratios and, where appropriate, Sum of the Parts (SOTP) valuations.

<ul>
<li>Caixabank and Bankia’s merger talks are intensifying, and share exchange terms could be announced later this week; the relative valuation discussions are being driven by Caixabank’s currently largest shareholder Fundacio Bancaria la Caixa (Caixa Foundation) with 40%, and the Spanish government’s bank fund FROB, which holds a 62% stake in Bankia</li>
<li>Caixa Foundation needs to hold a minimum 30% stake post-merger to retain its tax benefits as a foundation; according to press reports, FROB’s post-merger stake could reach 16%</li>
<li>The current market valuation is, in our view, skewed in favour of Bankia shareholders implying a relative valuation of 26% for Bankia and 74% for Caixabank; in post-merger terms, this would reflect a stake of 16% for FROB and 29.6% for Caixa Foundation; press reports suggest the Foundation could reach its 30% threshold post-merger by adding to its Caixabank holding pre-merger</li>
<li>Caixabank management may find the interests of minority shareholders compromised by pressure from the Spanish government, the ECB, the Bank of Spain to get the deal done, and as long as Caixa Foundation is not opposed</li>
<li>Current market valuations – 26% Bankia, 74% Caixabank – do not sufficiently factor in Bankia’s challenges, despite the long run cost savings which we estimate at 20%+ including the potential for Caixabank to drive digital banking efficiencies</li>
<li>Bankia’s poorer track record on credit quality, with its long run charge-off ratio is clearly higher than that of Caixabank; Bankia also has poor pre-provision profitability and ROAE and has also suffered from past corporate governance failures, not to mention a government bailout</li>
<li>We believe that Caixabank management should push for a valuation ratio of 22% Bankia to 78% Caixabank at merger, although we fear that under “bigger picture” pressures the chances of this are diminishing; if Bankia is valued at 25% or more of the merged group, this implies near term share downside risk for Caixabank</li>
<li>Risks to our positive view on Caixabank include an overly optimistic valuation for Bankia at merger, which would lead to worse-than-expected dilution for Caixabank shareholders, and the potential for worse than expected credit quality emerging, especially from the post-merger Bankia credit portfolio</li>
</ul>


Caixabank and Bankia’s merger talks are intensifying, and share exchange terms could be announced later this week; the relative valuation discussions are being driven by Caixabank’s currently largest shareholder Fundacio Bancaria la Caixa (Caixa Foundation) with 40%, and the Spanish government’s bank fund FROB, which holds a 62% stake in Bankia
Caixa Foundation needs to hold a minimum 30% stake post-merger to retain its tax benefits as a foundation; according to press reports, FROB’s post-merger stake could reach 16%
The current market valuation is, in our view, skewed in favour of Bankia shareholders implying a relative valuation of 26% for Bankia and 74% for Caixabank; in post-merger terms, this would reflect a stake of 16% for FROB and 29.6% for Caixa Foundation; press reports suggest the Foundation could reach its 30% threshold post-merger by adding to its Caixabank holding pre-merger
Caixabank management may find the interests of minority shareholders compromised by pressure from the Spanish government, the ECB, the Bank of Spain to get the deal done, and as long as Caixa Foundation is not opposed
Current market valuations – 26% Bankia, 74% Caixabank – do not sufficiently factor in Bankia’s challenges, despite the long run cost savings which we estimate at 20%+ including the potential for Caixabank to drive digital banking efficiencies
Bankia’s poorer track record on credit quality, with its long run charge-off ratio is clearly higher than that of Caixabank; Bankia also has poor pre-provision profitability and ROAE and has also suffered from past corporate governance failures, not to mention a government bailout
We believe that Caixabank management should push for a valuation ratio of 22% Bankia to 78% Caixabank at merger, although we fear that under “bigger picture” pressures the chances of this are diminishing; if Bankia is valued at 25% or more of the merged group, this implies near term share downside risk for Caixabank
Risks to our positive view on Caixabank include an overly optimistic valuation for Bankia at merger, which would lead to worse-than-expected dilution for Caixabank shareholders, and the potential for worse than expected credit quality emerging, especially from the post-merger Bankia credit portfolio


Caixabank-Bankia: Share Exchange Tug-Of-War, in a Merger of Unequals

Last Week in Event SPACE: Vedanta, Cardinal Res., Japan Retail Fund, HSBC, Opticomm, Tiffany/LVMH

The markets have enthusiastically greeted the merger conversations between <a href="https://www.smartkarma.com/entities/caixabank-sa" target="_blank" data-smartkarma-citation="entities:21255:1" rel="noopener">CaixaBank SA (CABK SM)</a> and <a href="https://www.smartkarma.com/entities/bankia-sa" target="_blank" data-smartkarma-citation="entities:21252:1" rel="noopener">Bankia SA (BKIA SM)</a> . This operation is in fact, a takeover of Bankia by CaixaBank.
<ul>
<li>This merger seems wise from both strategic and cost-savings perspectives. On the day of announcement, Bankia share price increased by 32.9% while that of CaixaBank increased 12.4%.</li>
</ul>
This follow-up note contains some background information about the former Spanish savings banks.
Foundation La Caixa, the third largest foundation in the world, and is seeking a stake of at least 30% in the merged entity. The current market caps (9 September) imply a conversion ratio of 0.68 CaixaBank shares per each Bankia share. CaixaBank should press for a lower exchange ratio: for a 30% stake of the Foundation, the exchange ratio would be 0.646 (at 9 September closing prices). The FROB would own 15.37% using this ratio.
The parties are currently negotiating this ratio and the takeover premium for Bankia's shareholders.
Regarding approvals, the CNMC (the Spanish competition watchdog) will be notified. There may be some issues regarding branch networks in some regions and pension plans market share, but with some minor remedies, the merger should pass muster. The merger has already the blessings of the Ministry of Finance, the ECB and the Bank of Spain.
The merger will generate over EUR 8 bn of badwill (which will partly compensate for the cost of synergies). A quick calculation of synergies would take 45% of LTM Bankia non-interest expense, EUR 1,701 mn, to yield EUR 536 mn of net synergies by 2023e.
The interloper risk would mean a competing offer for Bankia. I consider this low risk.

The markets have enthusiastically greeted the merger conversations between CaixaBank SA (CABK SM) and Bankia SA (BKIA SM) . This operation is in fact, a takeover of Bankia by CaixaBank.

This merger seems wise from both strategic and cost-savings perspectives. On the day of announcement, Bankia share price increased by 32.9% while that of CaixaBank increased 12.4%.

This follow-up note contains some background information about the former Spanish savings banks.
Foundation La Caixa, the third largest foundation in the world, and is seeking a stake of at least 30% in the merged entity. The current market caps (9 September) imply a conversion ratio of 0.68 CaixaBank shares per each Bankia share. CaixaBank should press for a lower exchange ratio: for a 30% stake of the Foundation, the exchange ratio would be 0.646 (at 9 September closing prices). The FROB would own 15.37% using this ratio.
The parties are currently negotiating this ratio and the takeover premium for Bankia's shareholders.
Regarding approvals, the CNMC (the Spanish competition watchdog) will be notified. There may be some issues regarding branch networks in some regions and pension plans market share, but with some minor remedies, the merger should pass muster. The merger has already the blessings of the Ministry of Finance, the ECB and the Bank of Spain.
The merger will generate over EUR 8 bn of badwill (which will partly compensate for the cost of synergies). A quick calculation of synergies would take 45% of LTM Bankia non-interest expense, EUR 1,701 mn, to yield EUR 536 mn of net synergies by 2023e.
The interloper risk would mean a competing offer for Bankia. I consider this low risk.

CaixaBank - Bankia Negotiations:La Caixa, Approvals, Badwill, Exchange Ratio and Synergies

Spain

CaixaBank accepts deposits and offers banking services.  The bank offers portfolio management services, insurance, investment strategy advice, international banking services, and other specialist financial services.

Price Gauge
52-week Range	0.00 - 0.00
Market Cap (USDm)	0.00
P/E	0.00
Dividend (Yield)	0.00

CaixaBank SA (CABK SM)

BEA (23 HK): Big Banc Theory And Elliott's Hard Slog

Just two months before Elliott Management and Bank Of East Asia (23 HK) head back to court to arbitrate on BEA's purported overarching relationship...

David Blennerhassett

CaixaBank - Bankia: Definitive Agreement and Exchange Ratio

The Boards of both Bankia and CAixaBank have approved the merger of both entities to create the biggest domestic bank in Spain.

Jesus Rodriguez Aguilar

Last Week in Event SPACE: Vedanta, Cardinal Res., Japan Retail Fund, HSBC, Opticomm, Tiffany/LVMH

Last Week in Event SPACE ... Plus, other events, CCASS movements and Mood Spins. (This insight covers specific insights & comments...

David Blennerhassett

CaixaBank - Bankia Negotiations:La Caixa, Approvals, Badwill, Exchange Ratio and Synergies

The markets have enthusiastically greeted the

Jesus Rodriguez Aguilar

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)

BEA (23 HK): Big Banc Theory And Elliott's Hard Slog

Just two months before Elliott Management and Bank Of East Asia (23 HK) head back to court to arbitrate on BEA's purported overarching relationship...

David Blennerhassett

CaixaBank - Bankia: Definitive Agreement and Exchange Ratio

The Boards of both Bankia and CAixaBank have approved the merger of both entities to create the biggest domestic bank in Spain.

Jesus Rodriguez Aguilar

Caixabank-Bankia: Share Exchange Tug-Of-War, in a Merger of Unequals

Caixabank and Bankia’s merger talks are intensifying, and share exchange terms could be announced later this week; the relative valuation...

Victor Galliano

Last Week in Event SPACE: Vedanta, Cardinal Res., Japan Retail Fund, HSBC, Opticomm, Tiffany/LVMH

Last Week in Event SPACE ... Plus, other events, CCASS movements and Mood Spins. (This insight covers specific insights & comments...

David Blennerhassett

CaixaBank - Bankia Negotiations:La Caixa, Approvals, Badwill, Exchange Ratio and Synergies

The markets have enthusiastically greeted the

Jesus Rodriguez Aguilar