Acquisition of BHF Bank by RHJ is still on the rails

RHJI in a brief press release confirmed that it still in negotiations to acquire Germany-based BHF Bank from Deutsche Bank, a process that started on 7 July 2011 in the form of exclusive negotiations. Support from co-investors has been secured and an informal dossier has been submitted to German watchdog BaFin.

News:
Firstly, the press release indicates that RHJI secured approval from co-investors that will invest at the level of 100%-held Kleinwort Benson Group (KBB/KBCIH, i.e. Kleinwort Benson Private Bank, Kleinwort Benson Channel Islands and Kleinwort Benson Investors) if the deal goes through. The support of co-investors implies an external valuation for Kleinwort Benson Group in its current form, which we estimate at € 278m, or equal to its equity value. No details have been disclosed regarding either the implied valuation of KBB/KBCIH or the BHF-Bank deal in itself. Secondly, the press release states that at this point of stage the negotiations are informal in nature, which leads us to believe that no formal deadline has been set regarding feedback from BaFin to RHJI.

Our View:
As we’ve summarised in a December 2011 flash note and details concerning the pending acquisition, we believe that RHJI’s intention to take control of BHF Bank along with the parallel shedding of its legacy portfolio (Shaklee, SigmaXYZ and guarantees given to Unison/Asahi Tec) is a credible scenario from a long-term, industrial viewpoint. It should pave the way for a merger between RHJI International NV and Kleinwort Benson Group and allow both optimising the cost structure at the holding level and hammering out some operational synergies. Though today’s target-rich environment means that missing out on BHF wouldn’t necessarily derail this ‘transformation’ process, we believe that a no-go from BaFin will prompt a cash return to investors. The latter forms part of the recent request by activist investor Equilibria Capital Management, which in its letter didn’t mention the acquisition of BHF Bank as an option to create shareholders’ value. Hence, today’s release might trigger a negative reaction from shareholders that had been hoping for RHJI to fold into Equilibria’s demands. On the other hand, we believe the blatant undervaluation that is reflected in today’s share price will provide more than adequate buffer.

Conclusion:
Based on yesterday’s closing prices, we estimate adjusted equity value p.s. at € 7.27 per share (Private Banking: € 316.6m, 50.9% of NAV; Industrial/legacy Portfolio: € 67.9m, 10.9% of NAV; cash: € 237m, 38.1% of NAV). We have a Buy rating and a € 6.2 TP (which implies a 15% discount to NAV and leaves 58% upside).