UOB gets Bank of Asia on the cheap

ABN AMRO''s forced sale of Bank of Asia proves a steal for UOB at $550 million.

UOB has won its bid to take over Bank of Asia, Thailand's ninth-biggest bank by assets. The 80.77% stake, which it is buying from ABN AMRO, will cost the Singaporean bank Bt22.02 billion ($550 million) and significantly elevates its presence in the kingdom.

In line with the Bank of Thailand's financial sector masterplan, which dictates that banks must have only one presence in the country, UOB will merge Bank of Asia with UOB Radanasin, its existing local operation. The combined bank will have total assets of Bt227 billion and a network of 161 branches, which quadruples UOB's asset base in the country.

The same single-presence rule that will see Bank of Asia and UOB Radanasin merge is also the motivation for ABN's sale. The masterplan forces banks to make a decision on their future in Thailand, whether they will corporatize as local institutions or become foreign branches, and gives them just six months to make up their minds. That period expires at the end of July.

ABN had planned to sell the stake anyway, but the central bank's uncompromising deadline forced its hand. "They've been unwittingly pressured," says Mark Williams, an anlayst at Fox-Pitt, Kelton. "They would have preferred to get it in shape before selling. Banks are on an upswing at the moment, enjoying super-normal profits, so in another year Bank of Asia would have looked much more profitable."

A bad deal for ABN looks like a pretty good one for UOB. It bought the shares at Bt5.35, which is a 9.6% premium to Tuesday's closing price of Bt4.88 and only a fraction over the average price for the last year - it was as high as Bt6.50 in September - and works out at 1.87 times Bank of Asia's book value.

Past foreign acquisitions have gone for much higher multiples, highlighting how badly the central bank's decision has hurt ABN and the minority shareholders of Bank of Asia. In 1998 ABN paid three times book value for the same stake and UOB paid about the same multiple for its own stake in Radanasin. Thai banking stocks are trading at about 1.5 times book at the moment, which means that UOB paid only a small premium over the market in return for a controlling stake.

Analysts hailed the deal as a positive move for UOB, saying that it shows the willingness of the bank's management to deploy its surplus capital, which is otherwise depressing its return on equity. Although Bank of Asia is not a heavyweight in Thailand it will enhance UOB's value; the bank's strategy will not be to go againt the big players but to focus its skills in technology, risk management and product development to compete in the rapidly expanding consumer sector.

CSFB, which acted as adviser to UOB on the deal, said in a research report published in March that Bank of Asia "has the best consumer banking franchise in Thailand". Presciently, the author of the report also noted that "the bank is particularly attractive for foreign banks that own small local licences, such as UOB Radanasin".

However, in the post-masterplan banking industry, size will matter more than ever in Thailand and analysts expect UOB will need to make more acquisitions if it is to have a serious presence going forward. Singapore rival DBS, which lacks the surplus capital of UOB, recently sold its own Thai bank into a three-way merger with Thai Military Bank and IFCT in recognition of the fact that it wouldn't be able to achieve the scale to compete otherwise.

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