Oversea-Chinese Banking Corp. has agreed to buy Wing Hang Bank, one of the few remaining family-run lenders left in Hong Kong, for $4.99 billion (HK$38.4 billion).
The deal, which still needs regulatory approval, is potentially the biggest acquisition of a Hong Kong-based bank since 2001 when OCBC’s rival Singaporean bank DBS Group acquired Dao Heng Bank.
Hong Kong’s smaller banks have long looked ripe for consolidation as they grapple with increased competition from mainland Chinese banks expanding across the border and with higher costs as a result of having to comply with new rules, most of which are globally driven, such as Basel III.
OCBC’s bid follows closely on the heels of mainland China-based Yue Xiu’s acquisition of Chong Hing Bank, Hong Kong’s smallest family-run lender, at 2.1 times 2013 book value. That deal was completed in October.
The sale prices of Wing Hang and Chong Hing are broadly comparable. Wing Hang is being sold at 1.77 times book value as of December 13. However, that includes dividends already earmarked for distribution. If those are stripped out the bank’s book value per share falls to HK$68.97 from HK$70.59.
Also adjusting for property values that Wing Hang marked-to-market (as opposed to Chong Hing, which held its property at historical cost except for its headquarters) brings the book value per share down to HK$62.03 – resulting in a comparable book value of two times the book.
The HK$125 per share bid also represents a premium of 49% over the closing price of HK$83.80 as of September 16, before Wing Hang first spoke about a sale.
“We believe the offer price represents an attractive opportunity for our shareholders to realise the investment value of Wing Hang,” said Patrick Fung, Chairman of Wing Hang in a statement [pictured below].
Goldman Sachs, KPMG Corporate Finance, Nomura and Freshfields advised Wing Hang. Bank of America Merrill Lynch and Slaughter & May advised OCBC. Wing Hang’s major shareholders, members of the Fung family and Bank of New York Mellon, and certain other Wing Hang shareholders, who together hold shares representing approximately 48.2% of Wing Hang’s entire issued share capital, have accepted the offer. OCBC Bank has also agreed to buy another 2.5% from Aberdeen so it already has binding commitments for majority control.
Long time in the works
Nomura’s investment bankers approached Wing Hang’s Patrick Fung In the summer of last year to discuss a potential sale and brought him prospective buyers. Nomura was then engaged by Wing Hang to help conduct negotiations, according to people familiar with the matter.
Singapore’s United Overseas Bank, Australia’s ANZ and Chinese insurer Anbang showed interest in the early stages of the sale, the people said. Morgan Stanley advised Anbang.
As talks progressed Wing Hang found it would have to disclose non-public information to prospective suitors to make them comfortable with the sale so it issued a statement to the Hong Kong Stock Exchange in September, alerting the market that third parties had made an approach.
Goldman Sachs was also brought in to help conduct a wider auction process. The US investment bank helped negotiate with OCBC, which soon emerged as a frontrunner as it was offering a bigger cheque and regulators viewed it as a safe pair of hands.
OCBC and Wing Hang entered into exclusive negotiations at the year-end. Since then the talks were dragged out as the two parties sought regulatory approval.
They had to obtain approval from the China Banking Regulatory Commission as well as both OCBC and Wing Hang have banking licences in mainland China. There was also a discussion between the Hong Kong Monetary Authority and the Monetary Authority of Singapore over which mainland Chinese entity, either OCBC’s or Wing Hang’s, would survive as both regulators were keen to maintain oversight. The banks won HKMA preliminary approval last week.
This latest round of Hong Kong bank takeovers comes as revenues are shrinking and costs are rising – book multiples are not what they were.
When state-controlled China Merchants Bank’s HK$17 billion purchased a 46.9% stake in Wing Lung Bank in 2008 it paid 2.9 times the Hong Kong bank’s historical book value. DBS Group acquired Dao Heng Bank in 2001 for an eye-popping 3.3 times its historical price-to-book value – a deal which the Singaporean bank subsequently struggled to digest and make pay-off.
Some analysts and bankers speculate that Hong Kong's remaining and fiercely independent families will finally also agree to sell up, even though their companies have been in their families for decades.
The share prices of the only other family-controlled banks left in Hong Kong – Dah Sing and Bank of East Asia - have risen on speculation that they too will be caught up in a consolidation of the sector.
However, the Li family, which founded and still manages Bank of East Asia, the largest of the four remaining independents, has made it very clear that they do not wish to sell. BEA’s shareholders include Spain's Caixa Bank with a 1.46% stake, Guoco Group with 15.0%, Japan's Sumitomo Financial with 9.5% and the Li family with 7%.
Shareholder BNY in 2008 wanted to sell 10% of Wing Hang to China Life and 5% to the Fung family but the deal fell apart as the regulator, the Securities & Futures Commission, deemed the transaction as connected and would require a full takeover by the Fung family.
Also Dah Sing announced a rights issue on March 26 to boost its common equity tier-1 capital from 10.4% to 11.4% to support growth and manage its increased capital requirements under the Basel III implementation.
It is buying time.