It has been a busy weekend at Bank Danamon Indonesia’s headquarters in Jakarta after the Indonesian lender said after the market closed on Friday that its parent company, which is owned by Temasek Holdings, has received an offer for its 67.4% stake in the bank. According to sources, the bid came from Singapore’s DBS Group, and could end up being the largest bank takeover in Indonesia ever.
Danamon is the sixth largest bank in Indonesia by assets and as of the close of trading Friday it had a market capitalisation of Rp44.09 trillion ($4.8 billion). This values Temasek’s stake at about $3.2 billion, before taking into account any potential takeover premiums.
In its brief statement, which was published in Bahasa on the Indonesian Stock Exchange, Danamon said it wasn’t aware when the transaction may take place, but requested its shares be suspended from trading today. However, a source said the bid was made on the premise that DBS would be able to do 48 hours of due diligence over the weekend, which suggests that a further announcement could come today. Indeed, other sources said that more information was expected to be released this morning.
Temasek confirmed on Friday that its financial arm, Fullerton Financial Holdings, has received a bid for its Danamon shares, which are held through an entity called Asia Financial Indonesia. DBS hasn’t yet said anything and Credit Suisse and Morgan Stanley, which are advising DBS, both declined to comment over the weekend.
Observers said that an acquisition in Indonesia makes sense for DBS, which has been looking for ways to expand its businesses outside Singapore and Hong Kong, into the higher growth markets in the rest of Asia. China and India are likely of interest, but more restrictive regulations surrounding the foreign ownership of banks in those two markets makes a takeover there more difficult. Indonesia too is said to be pondering tighter ownership limits for foreign banks, but so far no decisions have been made.
Also, given that the Danamon shares will be transferred from one Singapore entity to another and from a financial investor to a strategic one, it shouldn’t trigger any major objections from the Indonesian regulators, one source said.
For the past couple of years, DBS Group's CEO, Piyush Gupta, has been focusing primarily on turning around the bank’s existing businesses and this will be his first major acquisition since he took the helm at the bank in late 2009.
In an interview with FinanceAsia for our cover story in October 2010, Gupta noted that there is a viable role for an Asian bank in the region that is distinct from one-country banks or international Western banks. “DBS is in a position to take that role and compete effectively,” he said.
In the same interview, he said that DBS has no interest in competing with the bulge bracket firms for investment banking business outside of Singapore. Instead, its primary focus will be on building a regional business servicing small and medium-sized enterprises, and to capture the regional opportunities within wealth management.
On its website, DBS says that outside of Singapore and Hong Kong, its key markets are China, Indonesia, India and Taiwan and adds that it has made good progress in growing its business in these markets
There has been no indication so far of what DBS would be willing to pay for the shares, but one banker not involved in the transaction notes that historically Indonesian banks have fetched valuations of at least three times their historical book value when acquired. Notably, the sale of a controlling stake in Bank Internasional Indonesia (BII) to Maybank in 2008 by Temasek and Kookmin Bank was done at 4.5 times book. And when RHB Capital bought 80% of Bank Mestika Dharma in October 2009 it paid 3.5 times book. Both those banks are smaller than Danamon.
Obviously, the market environment has changed somewhat since then, but observers argue that DBS would probably need to pay close to three times for a bank that is delivering more than 20% loan growth per year and which is one of the best capitalised banks in the Southeast Asia. However, DBS will be wary of being seen as paying too much, as was the general view after it acquired Hong Kong’s Dao Heng Bank for $5.8 billion in 2001 – DBS’s largest acquisition so far.
Bank Danamon’s share price has been on a declining trend in the past 12 months and, according to Bloomberg data, it is currently trading at 1.5 times its estimated book value for 2012. Thus, a price of three times book would imply an initial deal value of up to $6 billion. Following an acquisition of Temasek’s stake, DBS will also have to make a general offer for the remaining shares (32.6%), which could increase the total acquisition cost by another third. It is unclear whether it would be allowed to buy 100% of Danamon, however, or will need to maintain a listing of the bank. In the past, the Indonesian regulators have asked acquirers to maintain a 20% free-float of their targets, but they haven’t really enforced it. BII and Bank Ekonomi (which was bought by HSBC) currently have a free-float of just under 10%.
Adding an interesting element to the transaction is the fact that Temasek owns about 27% of DBS as well. This suggests that DBS should have had a fairly clear idea of what it is seeking to buy, even before the due diligence exercise over the weekend. Indeed, there has been speculation on and off that Temasek would instigate a merger between DBS and Danamon, so this is unlikely to be the first time the buyer has looked at its Indonesian counterpart.
If DBS intends to pay for the acquisition in cash, sources say it will need to do some form of capital raising, potentially through a follow-on equity offering. But, if part of the consideration is settled through shares, this may not be necessary.
So far, it seems Temasek has been working without a financial adviser, and it is unclear whether it will appoint one – although for a deal this size it is likely to be approached by a number of banks offering services. Both Danamon and DBS will need to hire someone to advise their minority shareholders of the merits of a takeover bid – assuming that one does materialise.