Banco de Oro returns to equity markets

Philippines'' most active issuer raises $100 million from a GDR.

Banco de Oro Universal Bank (BDO) controlled by the Philippines Sy Family, has broadened its foreign shareholder base through a $100 million GDR issue. The 7.875 million unit deal was priced on Friday (January 20) at $12.70 per unit.

Pricing at this level represented a 3.75% discount to the stock's 30 day moving average of Ps34.5 based on a ratio of one GDR per 20 shares. The secondary share offering had been marketed at a zero to 9% discount by lead manager Macquarie Securities. There is also a $15 million greenshoe.

The order book is said to have closed just over two times covered with participation by about 25 investors of whom 41% came from the US, 32% from Europe and 27% from Asia. Interest is said to have been driven by news of the bank's takeover bid for its larger domestic rival Equitable-PCI (EPCI), which was announced in the first week of January.

Commenting on the proposed takeover, BDO President Nestor Tan says, "I think most investors realise the business case for merger and consolidation in the Philippines banking industry. They understand the benefits and synergies of the new entity."

The vendor of the share sale was Primebridge Holdings, which holds a 23% stake in the bank. The SPV is 80%-owned by SM Investments Corp (SMIC) - the Sy family's main vehicle - and 20% by another company in the same group. The SM Group also holds 36% in BDO outright.

While BDO will reap none of the proceeds from the sale, the GDR issue was executed in order to allow the SM group to increase its stake in EPCI further - should shares become available.

"We had two objectives," comments SMIC's Chief Financial Officer Jose Sio. "One, to increase the liquidity in the share trading of foreign shareholders and two, to raise proceeds to finance our future projects and investments, which includes the acquisition of further shares of Equitable-PCI".

BdO has an agreement to purchase a 26% stake in EPCI from government pension fund manager Social Security System. This has been held up by the supreme court following a petition from a pensioners' group and a few politicians. Two weeks ago, BDO made a Ps41.3 billion ($787 million) all-share bid for all outstanding shares in the company, which EPCI is currently evaluating.

"If you look at the two banks, they complement each other and there are a lot of synergies across all business lines - from middle-market lending to consumer lending and trust and asset management," Tan says. "We also see consolidation possibilities in at least 15-20% of the total branch network and that will mean cost efficiencies for both entities."

BdO currently has about 250 branches, compared with EPCI's more than 430.

The third largest bank in the Philippines, EPCI has total assets of about Ps328 billion, which is about 1.5 times BDO's Ps214 billion level.

However, EPCI is expected to need fresh capital following a prospective write-down to comply with International Accounting Standards. This is likely to take the form of fresh equity.

BDO is arguing that a merger would eliminate need as EPCI would get access to BDO's much stronger balance sheet, which includes a capital adequacy ratio of 18.3% (at the end of 3Q05) 16.9% of which is Tier 1, and a prospective 2006 return on equity of

16.3%, compared with a sector average of 11%.

In a recent research report, Macquarie noted that a BDO merger with EPCI is not about bringing something totally new to the bank. Rather, it is about maintaining the current business lines and approach, but with more mass and dominance in each product.

"An expected improvement in the Philippine economic and political landscape would make a merged BDO ideally placed to capture a potential resurgence in credit demand

and bank services," the report said. "As such, BDO could be positioned as a growth story."

According to reports in the Philippine press, some of the existing holders of EPCI shares have received a competing offer from an undisclosed party to buy out their shares.

BDO and the SM Group already controls 34% of EPCI, which was acquired through a block transaction with the Go family in August, and can essentially veto any rival merger proposal - which would need a 67% majority to pass. SMIC may also use some of the funds raised through the GDR sale to buy up shares from EPCI shareholders who would prefer cash instead of new shares in a merged entity.

"If we merge and there some disgruntled shareholders who want to be bought out, we will consider it as long as the demand is reasonable," Tan adds.

The BDO president also indicates that his bank may consider raising its offer if a rival bid does emerge.

"We will be looking at it from a business point of view. We would like to settle this as soon as possible, so if there really is an interested party we would like to know about it so that we can assess the situation. Up to a certain point, I think we are willing to compete."

This latest transaction marks the second time BDO has raised funds in the equity markets since its IPO in 2002. In November 2004, it raised $50 million from a placement of common shares, which was targeted mainly to Asian investors. Since then the company's market cap has grown from about $300 million to roughly $620 million and management is now looking to embrace more European and US investors.

If the GDRs show good liquidity, Tan says the bank may well issue more in the future, noting that it is a cost-efficient way for overseas investors to get into the stock. Indeed, the GDR issue - including the greenshoe - will actually exceed the free-float of the common shares.

BDO's share price edged up Ps0.5o to Ps36.50 on Friday, outperforming the broader market, which edged down 0.03 per cent.

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