OTP Bank has announced bidding for a 69.9% stake in the privatisation of Romanian CEC. At the end of 2005, CEC had assets of EUR 1.53bn, equating to a market share of 4.3%, shareholders equity of EUR 158m and an after-tax profit of just EUR 1m. The bank has 1,400 branches, serving 3.1m clients, with deposits of EUR 1.31bn and loans of EUR 511.9m. The other two banks still in the bidding process are Raiffeisen and the National Bank of Greece.
In an interview with financial portal portfolio.hu, CEO Sandor Csanyi stated that although a number of banks have dropped out of the bidding process, the remaining competitors are determined to buy the bank. He stated that OTP Bank would certainly require a capital increase in order to buy the bank, though he thought the acquisitions to date could be financed without raising capital.
Commenting on organic growth in Romania, Csanyi commented that the branch opening is going smoothly and that OTP Bank could still obtain a considerable market share without CEC. OTP management in Romania believe it would be sufficient to have 150 branches to have sufficient reach and are concerned that restructuring CEC could take too much time.
Our view:
The market is speculating that the price of the bank could exceed EUR 500m and the finance ministry has been reported as saying that it should value the bank at EUR 1bn (70% would equate to EUR 700m), suggesting a price of 4.5x - 6.3x. Given the level of restructuring required and the bank's limited profitability, we would expect a price towards the low end of this range. Whilst Erste Bank agreed to pay EUR 3.7bn or 5.8x historic book for a 61.9% stake in Romanian BCR, that bank had a much stronger market position and higher profitability.
A full price is likely to be required to obtain CEC. Given that OTP Bank will be forced to fund such an acquisition by selling shares that are deeply undervalued, in our opinion, shareholders will be better off if the bank fails in its bid attempt.