Access acquisition on intercontinental Bank

Problem DogAccess will acquire a 75% stake or 15bn shares in Intercontinental Bank (Intercontinental) for N50bn, after AMCON recapitalises the latter to zero book value at the end of September 2011. AMCON will inject a further N10bn to acquire 15% of the recapitalised Intercontinental Bank. The implication is that existing shareholders of Intercontinental will own 10% of the recapitalised entity. CBN’s loan to Intercontinental Bank (N100bn) when the bank lost its independence to the CBN in 2009 will be repaid post-acquisition. Access Bank and Intercontinental will merge 12 months later.


The actual valuation of Intercontinental appeared to be a moving target. We think the best way to understand management’s comments are as follows:


(1) Significant dilution for existing Intercontinental Bank shareholders at the point of acquisition by Access…: Post-AMCON capitalisation to zero and further capital injection by both AMCON and Access Bank, the new entity is essentially being valued at N67bn or N3.33 per new Intercontinental Bank share. The implication is that existing shareholders of Intercontinental will see a significant dilution of 58% to N6.7bn (they own 10% of the recapitalised entity). This equates to 29kobo per Intercontinental shares (pre-acquisition shares) vs the 70kobo they are trading on today. What is not clear is how much exactly AMCON owns of Intercontinental Bank shares today (recall that AMCON is very likely to be holding some Intercontinental shares through the acquisition of share-backed loans from various banks in the form of collateral when their NPLs were swapped for AMCON bonds). Management appears not to have factored any AMCON-owned Intercontinental Bank shares into its calculations.

(2) …and potentially more by December 31, 2011: 90 days after the acquisition, existing shareholders of Intercontinental have the option to sell their shares to Access Bank for N2.75 per new Intercontinental shares. This implies a combined value of existing shareholders’ stake of N5.5bn (2bn shares), a further 17.5% dilution, in addition to the 58% at the point of acquisition. What is slightly confusing is what the NAV per share of the entity will be at this point (90 days after acquisition). Access Bank’s slides show a valuation of N32.7bn or N1.6 per new Intercontinental share for the recapitalised entity at this point. This implies a capital erosion in the new entity of 51%. Management stressed that this was a very conservative estimate which includes a worst-case scenario, reflecting losses a few months after the acquisition. Management encouraged investors to use a figure of N50bn, but this still implies 25% capital erosion. To add to the confusion, management stated that AMCON will take some of the expected losses at Intercontinental but did not provide any figures. As such, it is difficult to determine at this stage a realistic figure for the December 31, 2011 book value of Intercontinental…and the premium, relative to this book value, that existing shareholders can exit at N2.75 per share. Notwithstanding, the maximum potential cash outflow from Access Bank (if all existing shareholders took the option of exiting) is the N5.5bn (at N2.75 per share). It appears that AMCON will remain a shareholder well beyond the next 12 months as part of the agreement that has been signed.

(3) Impact on Access Bank – very high (positive) expectations by management: Management stated that the maximum potential dilution to Access Bank shareholders is 7% (at the point when Access merges with Intercontinental). There is not sufficient information available to calculate the forecast BVPS of Access and the capitalised Intercontinental Bank on a pro-forma basis. However, what is more significant is the potential earnings accretion to Access Bank that management is forecasting. The slides paint an extremely positive view of this transaction. Total post-tax synergies (including Intercontinental stand-alone earnings) are forecast at N24.1bn in 2012 and N32.4bn in 2013. Post minority interest, assuming no sale by existing shareholders, these figures imply earnings accretion to Access of N18.1bn and N24.3bn respectively. These figures are very much in line with our stand-alone Access Bank earnings forecasts in 2012 and 2013. There are two areas of clarification that are still needed after the call. First, although Access Bank’s slides show Intercontinental generating earnings on a stand-alone basis, management has also stated that the acquired bank will only serve as a funding center, not for risk asset creation purposes. Yet, Intercontinental’s stand-alone earnings are more than the synergies which are forecast for 2013. Second, management did not go into specifics as to how the synergies will be arrived at, although there was a subtle hint that branch rationalisation and headcount reduction were on the agenda. These are obvious areas to derive synergies in a transaction of this size but it would have been helpful if management had provided more details on how it plans to arrive at these savings, especially given their magnitude.