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لولا اختلاف النظر، لبارت السلع
Summary of key points in this post.
45% premium over market on 13.64% of shares from Shuaa and Goldilocks.
Tender offer proposed for remaining 30.95% of shares
Favorable Impact on GFH’s Consolidated Shareholders’ Equity
Background
On 6 June GFH announced it had increased its shareholding in KHCB from 55.41% to 69.05% as part of the “Group’s strategy to increase its ownership in KHCB.”
On 7 June GFH provided further details as follows:
With reference to GFH Financial Group’s announcement dated 6th June 2021 pertaining to the subject matter, GFH would like to announce that the increase of ownership in Khaleeji Commercial bank was pursuant to a sale and purchase agreement between GFH along with Shuaa Capital and Goldilocks Investment Company, to acquire their stake of 121,726,795 shares for a total of BD 8,764,329.240 equating to BD 0.072 per share.
On 8 June GFH announced that pursuant to Central Bank of Bahrain requirements regarding takeover and mergers, it had approached KHCB’s Board to make a proposed voluntary takeover offer for the remainder of KHCB’s shares.
Deal Analysis
According to the trading data from the Bahrain Bourse, during the period 4 January through 3 June 2021, the average price of a KHCB share was BD 0.050 (rounded to 3 decimal places). Typically the share trades at roughly 50% of book value.
The BD0.0720 acquisition price represents a 45% premium to the average trading price.
Since the GFH acquisition, the price has increased to just below BD 0.070 perhaps in anticipation of GFH offering the same BD 0.0720 price to remaining shareholders.
Apparently, KHCB is quite a valuable asset.
Though one might not have thought so from the fact that
KHCB required an additional BD 60 million in capital to meet CBB requirements
GFH had to buy the entire AT1 instrument
Or maybe you read Fitch Ratings comment on KHCB in their reaffirmation of GFH’s B credit rating. (That rating is below investment grade, if you didn’t know)
Following a balance sheet clean-up exercise in recent years KHCB's asset quality has been improving but is still weak and lags higher-rated peers'.
In any case I hope you are confident that the fact that Shuaa and Goldilocks are related parties had no effect on the 45% premium.
That being said, the size of the premium is perhaps perplexing.
Neither Shuaa nor Goldilocks were inclined to participate in the AT1. That would seem to evidence a lack of faith in KHCB's future.
One might think of them as perhaps motivated sellers of KHCB.
It is perhaps also difficult to imagine that there were other serious bidders interested in acquiring a minority stake in company where a single shareholder had control.
But then the ways of the market are mysterious and magical. Especially in the land of flying carpets.
Despite the premium, if you look at this earlier post on Goldilocks, you will see that Goldilocks acquired its stake in KHCB from Shuaa for BD0.096 a share. You will also note that KHCB didn’t pay any dividends since Goldilocks’ purchase.
So on this transaction Goldi has a roughly 25% loss from original cost.
No wonder Shuaa doesn’t publish data on Goldilocks’ performance, contrary to previous years.
In the post referenced above I also wondered if Shuaa had held on to its then 3.88% stake.
It certainly appears so because GFH says it bought shares from both Shuaa and Goldilocks and Goldilocks shareholding was 9.76% according to KHCB’s announcement.
Motives for the Transaction
So what is motivating GFH’s acquisition of KHCB?
Only GFH knows for sure but we can explore some possible rationales.
I've selected two for discussion:
- Overlooked gem
- Increase in GFH equity beyond the purchase price
Other possible reasons for the transaction could be “civic duty”, etc. And more than one motive may be operative.
As you read, you can decide for yourself which, if either, is the more compelling one.
Overlooked Gem
The market has fundamentally undervalued KHCB.
The canny folks at GFH are about to get KHCB “on the cheap”.
Thereby reaping rich rewards long into the future.
Accounting Magic
The key drivers of the appeal of this motive are two “facts”:
KHCB’s book value per share exceeds the acquisition price
GFH uses the book value—not the market or fair value—of KHCB’s assets and liabilities (and thus by the process of subtraction also KHCB’s equity) to prepare its consolidated financials.
As of 1Q 2021 KHCB’ s Book Value was roughly BD 0.160
By acquiring the shares GFH stands to benefit from the difference between book value (BD 0.16) and the purchase price (BD 0.072) and the happy application of rules for consolidated financial statements.
121,726,795 shares at BD 0.088 equals roughly BD 10.7 million or US$ 28.4 million.
Compare that to the BD 8.8 million purchase price.
A not inconsiderable gain on purchase.
You might well ask:
“How can that be? The P/B ratio is well below one. This can’t make economic sense.”
As I’ve posted here before, accounting does not always reflect economic reality.
Here’s how it would work in detail.
Recall that in its consolidated financials GFH records 100% of KHCB’s assets and liabilities in its (GFH”s) balance sheet using the values appearing in KHCB’s balance sheet. Their book values.
Therefore, net assets (equity) are also reflected in GFH’s financials at book values.
As the final step GFH allocates those net assets between shareholders in the Group and Non Controlling Interests (NCI) in the Consolidated Statement of Changes in Shareholders’ Equity based on their respective ownership/voting rights.
With the acquisition of an additional 13.64% in KHCB shares, GFH’s share of the net assets (total assets minus total liabilities) in KHCB will increase.
This increase in equity attributable to shareholders of GFH will be accompanied by a corresponding decline in equity attributable to NCI in GFH's financials.
If its tender offer for the remaining shares is accepted and completed, an additional increase in Group shareholders’ equity will occur.
Depending on the percent take up on the take over offer, the component in NCI related to KHCB may disappear from GFH’s financials.
But there is indeed more!
You will recall (and if you don’t here’s the link to that post) that in connection with its 2020 purchase of KHCB’s AT1, GFH was required to reduce its consolidated equity attributable to shareholders of the Group by US$ 59.9 million in its FY 2020 financials.
The US$ 59.9 million reflects the excess (positive difference) between (a) GFH’s “contribution”--the amount of the AT1-- and (b) GFH’s share of KHCB’s net assets based on its percentage shareholding in KHCB.
Now that GFH owns 69.05% of KHCB, it is entitled to “recover” some of that amount.
Similarly, it will also have to absorb some of the US$ 14.3 million share of issuance costs levied against the NCI in 2020. Perhaps as much as US$ 4.4 million.
We should see the impact of the 13.64% KHCB share acquisition most likely in GFH’s 2Q2021 financials.
Keep your eye on GFH’s financials to see if my prediction comes true and how the related entries are handled.
Are they disclosed separately as in 2020?
Booked directly to equity?
Or perhaps to income?
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