Thai bank merger creates third-biggest lender

Three-way tie-up starts ball rolling in banking sector consolidation.

Thailand's banking industry consolidation is officially underway with the three-way merger of DBS Thai Danu Bank, Thai Military Bank and Industrial Finance Corporation of Thailand. The merger will create the Kingdom's fifth-largest banking group by assets.

The merged bank will have total assets of Bt677 billion ($17 billion). It will become the country's third-largest lender with a loan book of Bt533 billion and will have a customer base of four million serviced from a network of 462 branches and 963 ATMs. The banks' boards have all approved the merger plan and it now goes to the central bank and ministry of finance to give the plan their stamp of approval.

Shareholders of DBS Thai Danu will own 21.2%, while those of Industrial Finance Corp (IFCT) will own 10.8% and the remaining 68% will go to Thai Military Bank (TMB) shareholders. The exchange ratios for the shares involved in the all-paper deal are based on the volume-weighted ordinary share prices in the month preceding January 28, the date when the memorandum of understanding was first signed.

According to the plan TMB will make two separate tender offers for the outstanding securities, including warrants and stapled securities, of the two banks. It will pay 0.9 TMB shares for each of Thai Danu's 3.25 billion securities, which represents no premium to the volume-weighted price. For the 1.66 billion IFCT securities it will pay a 15% premium, or 1.124 TMB shares for each one.

DBS itself will own a 16.1% stake in the newly merged entity and has expressed interest in increasing its stake in the future. The opportunity to do so will most likely come from buying up the ministry of finance's 31.2% stake, which it is not expected to want to hold on to in the long term.

Morgan Stanley advised TMB, JPMorgan advised DBS and Citigroup advised IFCT.

The merger will be overseen by an integration committee headed by TMB's General Pang Malakul na Ayudhya. DBS will be represented on the committee by Michael Hague, former CEO of RHB and Standard Chartered in Malaysia.

The deal was initiated by TMB, which was long known to be interested in a foreign partner after being turned down by ANZ. But when it approached DBS in November 2003 the timing was better. The bank had been recapitalized and, according to one banker familiar with the transaction, the deal began to move relatively quickly thereafter.

For TMB the motivation to link up with DBS was to get access to new products, sophisticated risk management systems and information technology. The deal will bring with it a wholesale consolidation of the back-office functions, with some operations transferring down to Singapore and some DBS staff relocating to Bangkok.

But the sophistication that DBS can bring to the table is only half the story. A two-way merger would still have left the new entity as only the sixth-biggest bank so there was still one eye on other potential recruits to the merger party. The ministry of finance, keen to push consolidation in the sector, suggested tying up with IFCT and all parties agreed that the opportunity to add scale was worth trying.

The deal, which is the first in what is expected to be a raft of mergers following the finance ministry's master plan for bank consolidation, is subject to shareholder approval. Each of the three banks will hold shareholder meetings in April. If they give the go-ahead the merger is expected to take place in the third quarter of 2004.

Legal advisers to the transaction are Baker & McKenzie (for TMB), Allen & Gledhill, plus Allen & Overy (for DBS) and Clifford Chance (for IFCT).

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