OTP Bank: market reaction to RBUA acquisition positive, despite uncertainty and likely sale of treasury shares
Following up on the announced acquisition by OTP Bank of 100% of Raiffeisenbank Ukraine (RBUA), its now clear that there will be no immediate announcement of a detailed business plan. The plans are expected to be revealed gradually over the next month and might be influenced by additional acquisitions, with OTP Bank bidding for a further Ukranian bank and a Russian bank. Despite this uncertainty, the immediate reaction to the acquisition was positive, with the stock trading up slightly on Friday, despite a full price having been paid. The acquisition price of €650m came in at the high end of expectations (rumours on the price had run as high as € 750m prior to the announcement). The year-end 2005 equity of RBUA was €139m and the pre-tax profit €39.7m, putting the acquisition on historical P/B of 4.7x and the pre-tax historical P/E at 16.4x. Assuming a 25% corporate tax rate, the post-tax historical P/E would equate to 21.8x.
In terms of capital, we expect the acquisition to trigger a partial sale of treasury shares. Based on the 1Q06 results, taking into consideration a dividend of 30% and retained earnings for 2006, OTP Bank sees € 250m of excess tier 1 based on a target total capital adequacy of 9.5%. Using this figure, which we think is realistic, and looking at the goodwill generated by the transaction of some €511m (less year-to-date retained earnings), its expected that OTP Bank could sell some 9.28m treasury shares. This is approximately half of the bank's total 18.6m shares held in treasury or 3.5% of the total shares outstanding (excl. treasury shares). However, a larger issue placement should not be ruled out, in our view, given plans for further acquisitions.
In terms of earnings dilution, if we assume 15% earnings growth for RBUA in 2006 or after-tax earnings of € 34.2m and we assume the transaction is financed through a partial share sale 9.28m shares (€ 250m) and partially debt (€ 400m), then the net proforma impact (at a 7% pre-tax cost of debt) on earnings of the deal would be € 13.2m or HUF 3.5bn. This suggests a mildly dilutive effect of 1.6% on EPS in year 1, which would gradually disipate over time if the pace of earnings growth could be maintained. Clearly, the challenge for OTP Bank long-term will be to meet its goal of a 15% ROI over a five-year timeframe. It should be noted that thus far, we do not have a P&L or balance sheet for the company for 2005 or a notion of its earnings quality.
RBUA has a market share of 3.6% on total assets of € 1.2bn, 3.6% and 4.0% in corporate deposits and loans respectively, and 1.6% and 5.0%+ in retail deposits and loans respectively. RBUA is the seventh largest bank in the Ukraine. The branch network of 42 branches and 17 representative offices is small but said to be of very high quality.
This is the first time that OTP Bank has paid more than 2.6x book for an acquisition and but, clearly, prices have risen given recent transactions such as Erste Bank's purchase of Romanian BCR for 5.8x historical book. Prior to the announcement, we had written that the market would be willing to accept a price paid for in the range of RBUA 4.0x - 5.0x book, as long as it appears justified by business plans. We now await further details on OTP Bank's plans for the Ukraine but in the interim reiterate our Buy rating on the stock, which is the cheapest of the major CEE banks (on P/E).