OCBC talks Keppel Capital

Chris Matten, CFO of OCBC Bank talks about the audacious bid for Keppel Capital Holdings and what it''s like to be in a Mexican standoff.

FA: Let's say IÆm a shareholder in Keppel Capital. Why should I accept your offer?

Matten: Keppel Capital Holdings (KCH) is worth more to us than it is to the existing shareholders for the simple reason that it's small. It's a nicely-run little bank with a good SME franchise and good consumer franchise. What we are able to do by integrating it with our own organization is realize some synergies. We are saying that one plus one is more than two. What we have put on the table is an offer that takes that 'more than two' and offers some of it to Keppel Capital Holdings shareholders and keeps some for our shareholders, so that both sets of people clearly benefit. It's a clear win-win proposition in a market consolidation play.

FA: Let's talk about the price youÆve offered: S$3.38 is clearly out of the money already given where the share price has moved to S$3.68 at yesterday's close. Other commentators are saying that it is rather on the low side at 1.7x book and less than the bankÆs historical goodwill-to-loan ratio of 20%.  

Matten: 1.7x book is the headline number. But if you look at KCHÆs balance sheet, you will see that it has a lot of surplus capital. Surplus capital is not worth more than one times û IÆm not paying more than a dollar for a dollar. If you strip that cash out, you will find that it is more like 2.2x book to 2.3x book. If you look at market mergers in the UK or the US, that is a ballpark number. 

FA: Are you prepared to get into a bidding war for this bank?

Matten: Consolidation in the Singapore market up to now has basically been a lot of people doing a lot of talk, and frankly that is all it's been. The reality is that we have put an offer on the table which is a very attractive offer. We stand by that offer and we are very confident that the offer will succeed. I donÆt want to go into hypotheticals about what other banks might or might not do. Right now, this is the only offer on the table.

FA: So you would be happy to see some other offers on the table?

Matten: We have demonstrated our action. It is up to others to decide if they want to act. We have put our best foot forward and put an attractive offer on the table. We stand by that offer. We are very determined to make this acquisition succeed but we are not desperate.

FA: Do you think Keppel Capital HoldingÆs shares are fairly valued at the moment?

Matten: I am not allowed to comment on that.

FA: You have become the first bank to fire a shot in the Mexican standoff that had developed in the Singapore banking market. Where is it going to finish?

Matten: Maybe it is an accurate shot. We hope it is and are confident that it is. There has been way too much talk in Singapore and not enough action. We have been working on this for months. This file was on my desk the day I joined OCBC Bank at the end of January. We have been working on it ever since. We have done a huge amount of homework on this. We have had teams of people go over the valuation and go over the synergies in enormous detail. I want to get rid of any mistaken notion that this is a sudden act. No, this has been a long, long time in preparation.

FA: So why launch the bid now?

Matten: We are ready to make our move and so decided to put our money on the table.

FA: What are your plans for the sale of OCBCÆs property assets? Could they form part of an eventual agreement with Keppel for their Keppel Capital HoldingsÆ shares?

Matten: We are definitely not in a position now to talk about any potential deals with Keppel. That is totally forbidden under the takeover code. There is no suggestion that we are going there. We have to treat all shareholders totally equally under the takeover code, and that is the right thing to do in my mind. So that is why we have gone this route [of a general offer]. There is a very unique, difficult holding structure. It is not like there is a single vendor. There is a complicated structure with a number of shareholders, who have different interests. That is why we thought going the route of a general offer is the right way to go. So let me say quite categorically that while the takeover is going on, there cannot be any suggestion of any deals between us and the other party.

The disposal of our non-core assets is totally separate from this transaction. The transaction is not conditional upon the disposal of any of our non-core assets, as we donÆt need the funding from the disposal of our non-core assets to fund this transaction. We have more than enough capital. But at the same time it does not mean we are going to stop trying to dispose of our non-core assets. We announced in April that the structured transaction was not going to work and we said that we would move to a piecemeal sale.

FA: Why are trying to consolidate your position in Singapore rather than expand overseas, such as DBS has done?

Matten: It is not a question of either or. The opportunity is clearly to build a bigger bank in Singapore. Big is not always good in life. But banking size is relevant, especially in a place like Singapore. Singapore cannot afford the luxury of five banks. It is just too small a country. In banking these days, the costs of competing, especially with the costs of technology, mean you have to have scale. Our consolidating in the domestic market enables us to build that greater home base. This deal will give us a bigger base and a stronger earnings stream back in Singapore and a bigger, more solid balance sheet. That in turn makes it easier for us to expand overseas as we will have a bigger balance sheet to leverage off and a bigger earnings stream to borrow against. So it is mutually enhancing.

From a financial point of view, subsequent to this acquisition, we end up with an 11% tier one ratio and 17% total capital ratio û very comfortable ratios to go with our very solid ratings. So we are by no means stretched financially.

From a management point of view, this acquisition is a domestic integration play. The skills that are required are from a particular set of managers who we have identified whose expertise is in doing a domestic integration. A cross-border transaction for us requires a different skill set. Apart from Malaysia -- where we cannot grow through acquisition because of regulatory impediments -- we donÆt have a retail banking franchise. So if, for example, we were to buy a retail bank in Hong Kong, there will be no integration issues because we have no retail presence here in Hong Kong.

FA: So firstly, you are saying that this is an M&A transaction driven by the need for extra leverage? In which case can we assume that this is the first step in a longer program?

Matten: Yes it is. This brings financial leverage, which is good for us as we have surplus capital and we need to leverage up our balance sheet. But it also brings business leverage.

FA: So with Malaysia off the cards and being full up in Singapore, can we expect you now to be focusing on greater China?

Matten: We continue to be ready willing and able to participate in further consolidation in Singapore, should the opportunity arise and the price is right.

FA: You mentioned foreign competition. It is great for you that you can make a general offer for another Singaporean bank when any other bank, which is not listed in Singapore, is not allowed to.

Matten: There is a period of time during which the Singapore government is pushing for consolidation. However, the government is also keen to liberalize the market more. It wishes to see the domestic banks strengthen up so that when the full force of competition is allowed to blow through Singapore, then the Singaporean banks are stronger. That is certainly part of the rationale of this transaction. But the level of competition in Singapore among the domestic banks is very keen. It is by no means an uncompetitive market place.

FA: What is the one factor about this deal that should make it attractive?

Matten: There has been a lot of talk. Everyone knows that this asset is worth more in integration than it is in standing alone. And we are providing an opportunity for shareholders to take advantage of that. The bid is on the table. It is attractive. And it is cash. These are pretty good reasons for looking at this favourably.

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