Why Equitable-PCI Bank shareholders should reject the SM Group offer; SEC should not approve the terms
Last week, SM Group announced that it would tender all the remaining Equitable PCI – (EPCI – P79.0) it does not own for P92.00 per share. Effectively, SM Group is looking to acquire 55.1% of EPCI for a total consideration of P36.9bn. Payment for the said purchase will be broken down into 4 trances – 10% by October 2, 2006, 10% by June 2 2007, 10% by Feb 2, 2008 and 70% by October 2, 2008.
I strongly suggest that shareholders of Equitable PCI Bank reject the deal. Both SSS and GSIS should seriously consider other options and lead the cudgels for the minority shareholders.
Why the deal sucks? Here are my arguments:
1.) Pricing – The offer price is equivalent to P80.50 and not P92.50 based on the present value of the offer price. This represents a negligible premium over the P70.50 weighted average traded price of EPCI for 2006. In most take over transactions, the pricing is at least 20% above the prevailing market price of the acquired company.
2.) Valuation – Effectively, SM Group is paying “just” 1.5x Price to Book (PBV) based on EPCI’s 06/2006 book value. Last May, Union Bank (UBP – P43.0) paid 2.0x PBV when it acquired iBank – (IBNK – P37.50). At the minimum, EPCI shareholders should be paid the same value equivalent to P107/share.
3.) Payment term – The SEC should not allow partial payment of the tendered shares. This will set a bad precedent in future tender offers. To be fair, they should require the SM Group to offer an outright payment option based on the present value of the offer price.
4.) Other people’s money - What is also unfair about the payment term is that effectively, the minority shareholders are the one funding the SM Group. I cannot imagine how one should sign-off his entire voting rights in exchange for 10% cash payment. Worst, the promissory notes to be issued by SM Group will backed by the same EPCI shares that it is going to tender. The SEC should at least require SM Group to put in additional collateral to back the promissory note.
5.) EPCI does not need SM Group – Obviously, it’s SM Group that needs EPCI to fast track its goal to become the number one bank in the country. All EPCI needs to do is to offer the 10.84% - 78.8m EPCI treasury shares; to its existing shareholders. The exercise should raise at least P6.5bn. This will be enough to recapitalize the bank at minimal dilution to its existing shareholders.
Unfortunately, it seems that the minority shareholders will be sucked out of the deal. Last week, Equitable PCI Investments agreed to tender the 10.84% EPCI treasury shares to SM Group without giving existing shareholders pre-emptive rights to the shares. This clearly violates the SEC Corporation Code which states that all shareholders be given equal rights to retain its stake in case of a dilution. I was wondering why our representatives in EPCI headed by SSS and GSIS chairpersons respectively approved the deal. They were placed in the board of the bank in order to safeguard the rights of the minority shareholders.
It seems that the writings are on the wall. What Henry Sy wants, Henry Sy gets. While, he might have finally won this battle, the group must brace itself for the negative PR impact. It is certainly not a good way to end his swan song.
I strongly suggest that shareholders of Equitable PCI Bank reject the deal. Both SSS and GSIS should seriously consider other options and lead the cudgels for the minority shareholders.
Why the deal sucks? Here are my arguments:
1.) Pricing – The offer price is equivalent to P80.50 and not P92.50 based on the present value of the offer price. This represents a negligible premium over the P70.50 weighted average traded price of EPCI for 2006. In most take over transactions, the pricing is at least 20% above the prevailing market price of the acquired company.
2.) Valuation – Effectively, SM Group is paying “just” 1.5x Price to Book (PBV) based on EPCI’s 06/2006 book value. Last May, Union Bank (UBP – P43.0) paid 2.0x PBV when it acquired iBank – (IBNK – P37.50). At the minimum, EPCI shareholders should be paid the same value equivalent to P107/share.
3.) Payment term – The SEC should not allow partial payment of the tendered shares. This will set a bad precedent in future tender offers. To be fair, they should require the SM Group to offer an outright payment option based on the present value of the offer price.
4.) Other people’s money - What is also unfair about the payment term is that effectively, the minority shareholders are the one funding the SM Group. I cannot imagine how one should sign-off his entire voting rights in exchange for 10% cash payment. Worst, the promissory notes to be issued by SM Group will backed by the same EPCI shares that it is going to tender. The SEC should at least require SM Group to put in additional collateral to back the promissory note.
5.) EPCI does not need SM Group – Obviously, it’s SM Group that needs EPCI to fast track its goal to become the number one bank in the country. All EPCI needs to do is to offer the 10.84% - 78.8m EPCI treasury shares; to its existing shareholders. The exercise should raise at least P6.5bn. This will be enough to recapitalize the bank at minimal dilution to its existing shareholders.
Unfortunately, it seems that the minority shareholders will be sucked out of the deal. Last week, Equitable PCI Investments agreed to tender the 10.84% EPCI treasury shares to SM Group without giving existing shareholders pre-emptive rights to the shares. This clearly violates the SEC Corporation Code which states that all shareholders be given equal rights to retain its stake in case of a dilution. I was wondering why our representatives in EPCI headed by SSS and GSIS chairpersons respectively approved the deal. They were placed in the board of the bank in order to safeguard the rights of the minority shareholders.
It seems that the writings are on the wall. What Henry Sy wants, Henry Sy gets. While, he might have finally won this battle, the group must brace itself for the negative PR impact. It is certainly not a good way to end his swan song.
posted by jack galt at
11:37 AM
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