Race for Emporiki growing into a risky chess game

The battle for the control of Emporiki Bank heated up last week as Bank of Cyprus became the second bank after Credit Agricole to submit a tender offer for 100 percent of Greece’s fourth-largest commercial bank. If pundits are right, this will not be the last bid and it remains to be seen whether local banks join the fray directly or indirectly with a foreign partner, raising the stakes for a bidding war which may hurt rather than help them. Following Credit Agricole’s cash offer for 100 percent of Emporiki ordinary shares at 23.5 euros per share, valuing Emporiki at about 3.1 billion euros, Bank of Cyprus (BoC), headquartered in Nicosia, Cyprus, became the second bank to place a bid, consisting of 6.0 euros per share plus 3.25 new BoC shares, pending the approval of its shareholders in an extraordinary assembly meeting projected for July. Things would have been simpler if it were not for Piraeus Bank, the country’s fifth-largest bank, announcing it held a 6.0 percent equity stake in Bank of Cyprus with many in the market suspecting it may be even bigger if any potential indirect stake is counted for, raising the total stake closer to 10 percent. Some even suspect that Piraeus Bank may have had an understanding with some of Bank of Cyprus’s existing shareholders, make it possible to control BoC at some point in the future. Alpha and Eurobank Given Bank of Piraeus’s drive to get bigger and its rumored interest in Emporiki, this development was taken very seriously by Alpha Bank and EFG Eurobank, the other two prospective domestic contenders for Emporiki. Investment bankers and analysts believe Alpha and EFG Eurobank may have paid less attention to a BoC bid for Emporiki if it were not for Piraeus for two reasons. First, they do not think a Bank of Cyprus bid has much chance of beating Credit Agricole’s. Second, even the doubling up of the largest bank of Cyprus, following the acquisition of Emporiki, does not represent such a big threat to Alpha Bank or Eurobank EFG. The combined BoC-Emporiki bank would have had a market cap of 7.5 billion euros, a bit lower than Alpha’s 8.0 billion euros and Eurobank’s 8.7 billion euros but much higher than Piraeus’s 5.0 billion euros. The combined entity would have had 470 branches in Greece and 176 branches in Southeastern Europe compared to 385 and 180 respectively for Alpha Bank and 310 and 391 branches respectively for EFG Eurobank. Piraues has 273 branches in Greece and 176 in the greater geographical area. Serious contender On a pro rata basis, the combined Bank of Cyprus-Emporiki bank would have been a serious force to contend with in loans and deposits with 29 billion and 34 billion euros respectively, becoming the country’s second-largest bank in both categories. Still, other large banks may have been less annoyed because, as they point out, one should also take into account the likely loss of up to 20 percent of existing revenues in a potential Bank of Cyprus-Emporiki tie-up, as it is customary in M&A cases. This loss of revenues had to be made up from other sources, namely costs, but this is not an easy task for a country like Greece where labor laws are not very flexible. Moreover, the time required to restructure the new entity could be quite extended with integration issues at the forefront, potentially missing the last growth phase of Greece’s fast maturing retail banking industry. The fact that Bank of Cyprus chose to proceed with a large share capital increase in kind, that is, new shares to be given to shareholders of Emporiki in exchange for theirs plus cash, makes one wonder whether the suspicions of the other large banks about the potential link between BoC’s bid and Piraeus Bank’s move are justified. The planned share capital increase in kind by BoC has the potential to cause a lot of dilution to its existing shareholders, including Piraeus Bank. This is a bit strange. By buying BoC shares to up its equity stake during the recent slump, Piraeus Bank supported the Cypriot bank’s bid for Emporiki by keeping its shares from declining sharply. On the other hand, it is like Piraeus is accepting the dilution of its own stake, following a successful takeover of Emporiki by Bank of Cyprus, something which may be viewed unfavorably by some of its shareholders. These developments have not gone unnoticed by its domestic competitors, namely Alpha and Eurobank, which may try to guess what Michalis Sallas, the chairman of Piraeus Bank, has in mind but cannot afford to make any mistake in a chess game with strategic implications. This raises the chances that another large Greek bank may be tempted to submit a bid for Emporiki in conjunction with a foreign partner to overcome some legal obstacles. These relate to issues such as the time limitations for attaining a quorum in shareholders’ meetings called upon to vote for a share capital increase and the legality of seeking a share capital increase in kind in Greece. Those who espouse the BoC-Piraeus scenario point out that a bid by BoC for Emporiki may be embraced because BoC is based in Cyprus where companies can proceed with a share capital increase in kind to finance an acquisition. Whatever the case, there is little doubt that the likelihood of another large bank bidding for Emporiki has increased. This has the potential to provoke a response by another domestic player, bidding at a higher price, which may cast doubts in the eyes of foreign institutional investors about the quality of their management and raise questions about their judgment at a point in time small- and medium-growth cap stocks in peripheral markets, such as Greece, are not seen very favorably. All in all, the likelihood of a clash over Emporiki between the Greek large bank players has increased and this could hurt all of them, assuming bidding prices get out of control.

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