June 26, 2020

Breakingviews: Saudi $45 bln bank M&A is haunted by past failure

by Breakingviews.

Mohammed bin Salman wants a banking champion that’s worthy of his grand visions. Saudi Arabian retail investors may not care much about the crown prince’s dreams. That means National Commercial Bank, the government’s would-be vehicle for building a financial powerhouse, will have to pay up for Samba Financial.

The two banks on Thursday took the unusual step of announcing that they had arrived at a “framework agreement” for an all-share merger. Odder still, $30 billion NCB set out a range for the deal rather than an agreed price. The country’s largest lender will offer between 0.736 and 0.787 of its own shares for Samba. Using NCB’s undisturbed price, that implies an equity value of between $14.6 billion and $15.6 billion, and a premium of 19% to 27%.

There’s a reason for the unconventional announcement. NCB last year failed in its pursuit of $14 billion Riyad Bank, a deal which was also supposed to create a lender big enough to finance MbS’s megaprojects. Already-tense price negotiations were not helped by the fact that Riyad’s share price kept jumping around. NCB and its advisers may hope that having a range rather than a fixed price gives them more flexibility, for example if the constantly fluctuating oil price radically changes the market values of either group.

More likely, Samba’s minority investors will just expect to get the very top end of the range, since they hold the decisive vote. The Saudi Public Investment Fund, effectively a wing of the state, and other government agencies own roughly two-fifths of Samba. But MbS and co need 75% support to get the deal through. The rest of the shareholder base is dominated by retail investors, who typically pass the shares down through their families and enjoy the dividends. Unlike Samba’s government shareholders, they’re financially motivated.

As such, they may want a better valuation than the 1.2 times 2020 book value they’re being offered at the bottom of NCB’s range. Samba was worth 1.5 times at the end of 2019, Refinitiv data shows. But NCB can’t push too hard without jeopardising the crucial support of its own minority investors, who hold 45% of the shares and won’t want to overpay. That adds up to a tricky balancing act before the crown prince gets what he wants.


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