Saudi $46bln bank M&A works best for crown prince

The two banks said that they had struck a deal to create a “new Saudi banking champion” with more than $223bln of assets

  
Saudi traders are seen as they monitor stock information at the Saudi stock market in Riyadh, Saudi Arabia August 25, 2020. Image used for illustrator purpose

Saudi traders are seen as they monitor stock information at the Saudi stock market in Riyadh, Saudi Arabia August 25, 2020. Image used for illustrator purpose

REUTERS/Ahmed Yosri

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

LONDON - There are sound reasons for the $46 billion merger of Saudi Arabia’s state-backed National Commercial Bank and Samba Financial. Yet the deal terms seem a little stingy from the perspective of the latter company’s investors. That suggests Crown Prince Mohammed bin Salman, who wants a bank to fund his mega-projects, is the real winner.

The two banks said on Sunday that they had struck a deal to create a “new Saudi banking champion” with more than 837 billion riyals ($223 billion) of assets. It has been a long time coming. On June 25, they took the unusual step of releasing a “framework agreement”, in which NCB said it would offer between 27.42 riyals and 29.32 riyals worth of NCB stock for each Samba share. Sunday’s final terms landed roughly in the middle: Samba investors are entitled to 0.739 shares in the bigger bank - worth 28.45 riyals using Oct. 8 closing prices.

It could be better. Samba’s undisturbed share price on June 24 was 23 riyals, implying a respectable 24% premium. That’s not the full story, however, since shares in other Saudi lenders Al Rajhi Banking & Investment, Riyad Bank, Saudi British Bank and Arab National Bank1080.SE have risen 13% on average since then. Assume Samba shares would otherwise have done the same, and the real premium is less than 10%. Nor is the valuation particularly attractive, at 1.2 times the median Refinitiv estimate of 2020 tangible book value. NCB trades at 1.6 times, as did Samba as recently as December.

Compare that with the favourable deal the government is getting. Add together the various stakes held by the Public Investment Fund and other public bodies, and the state effectively owns 55% of NCB and 42% of Samba, based on Refinitiv data. Paying a smaller premium to Samba minorities therefore saves the government money. Meanwhile the deal gives MbS the giant lender he wants to help support his Vision 2030 turnaround programme for the kingdom.

Should Samba minorities block it Perhaps, but that would risk scuppering a deal which the banks reckon could deliver 800 million riyals ($213 million) in annual cost savings - worth almost 7 billion riyals once taxed and capitalised. Even a stingy merger may be better than none at all.

CONTEXT NEWS

- Saudi Arabia's biggest lender National Commercial Bank said on Oct. 11 that it had entered into a binding merger agreement with smaller peer Samba Financial to create a combined entity with 837 billion riyals ($223 billion) in assets.

- Samba investors will receive 0.739 new NCB shares for each one they hold in Samba, NCB said, implying a value of 28.45 riyals per Samba share. NCB said in an initial agreement in June that its offer would value Samba shares at between 27.42 riyals and 29.32 riyals.

- Saudi Arabia's sovereign wealth fund, the Public Investment Fund, is a major investor in both banks, with a stake of 44% in NCB and 23% in Samba.

- Samba shares were trading at 28 riyals at 0704 GMT on Oct. 12, or roughly 3% below the implied offer value of 28.82 riyals based on the latest NCB share price.

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

(Editing by George Hay and Karen Kwok) ((liam.proud@thomsonreuters.com; Reuters Messaging: liam.ward-proud.thomsonreuters.com@reuters.net))

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