BRE/Handlowy tempt merger opponents with dividend promise
BRE Bank and Bank Handlowy are hoping to overcome objections by two major shareholders, the Treasury Ministry and insurer Powszechny Zaklad Ubezpieczen (PZU), to their proposed merger with a sweet promise of future dividends, the banks said last week.
In the middle of November, Handlowy will start a road show to persuade shareholders that the planned merger is beneficial. In that presentation, the banks plan to pay special attention to "more sensitive shareholders" by handing out a special information kit that includes detailed explanations of how the merger would work, its long-term effects and why the proposed parity ratio of one BRE share to 2.4 Handlowy shares works, said Handlowy President Cezary Stypulkowski.
In discussions with shareholders, though, the banks will use one of their weightiest arguments: the potential dividend the merged entity could pay for 1999. The banks hope that the payment will help bring PZU and the Treasury Ministry, two major shareholders in Handlowy that have thus far protested the merger, into the fray. PZU and the Treasury Ministry hold more than 12% of Handlowy.
"We will have a record year in terms of net profit," Wojciech Kostrzewa, BRE Bank's president, told the Business Journal. "Thus, the dividend should be attractive for all shareholders."
For 1999, BRE Bank expects to post net profit of zl. 730 million ($182.5 million), and Handlowy estimates its net profit to be zl. 430 million ($107.5 million).
Assuming that the merged bank will pay 25% as a dividend which is what Handlowy historically does that would result in zl. 290 million ($72.5 million) to be distributed. At the proposed parity ratio of 2.4 to one, the merged bank will have about 148 million shares. That equates to a per-share dividend of zl. 2. Neither bank has preferential shareholders that would normally receive dividends off the top of the overall amount.
With 4.8 million shares, the Treasury Ministry would receive a dividend payment of about zl. 9.6 million ($2.4 million), double what it would be likely to see from Handlowy this year.
For its part, PZU would likely be handed as much as zl. 57 million ($14.25 million) for its more than 3.5 million shares and convertible bonds. In addition to its shares, PZU's convertible bonds translate into 25.3 million shares.
The two shareholders would see an even larger payment, however, if they managed to push through their desired parity ratio of 1.7 Handlowy shares for every BRE share. The chances of that happening, though, are slim, bank officials and analysts have said.
With a 1 to 1.7 parity ratio, the number of outstanding shares in the merged bank would be reduced to 131.7 million, increasing the per-share dividend to zl. 2.2. Under that scenario, the Treasury Ministry would see a dividend payment of zl. 10.56 million ($2.64 million), while PZU would get zl. 63.36 million ($15.84 million).
The unlikeliness of that parity ratio changing, though, means that PZU and the Treasury Ministry have three options: accept the merger at the current parity ratio; block the merger; or bring in another investor for Handlowy.
"Of course, PZU and the state treasury might think about another investor coming to Handlowy and paying a premium," said Adam Kalkusinski, a broker with Wood & Co. "The dividend is a strong argument, but it might not be enough."
Kalkusinski said that Handlowy's performance makes it likely that the Treasury Ministry and PZU could find a strategic investor that would be willing to pay a premium. Handlowy has been reporting return-on-equity (ROE) of about 14%, which is in line with other publicly traded banks, he said.
"Any investor would agree to pay a 50% premium for Handlowy shares," Kalkusinski said. "This would mean about zl. 90 per share."
The payback then would be high for PZU and the Treasury Ministry. PZU, for example, would get about zl. 2.6 billion ($650 million) for a more than 30% stake in Handlowy. That 30% figure includes the convertible bonds.
But that magical investor remains elusive.
"If PZU and the state treasury want to convince the other shareholders to vote with them (against the merger), they should present a concrete, alternative solution," said Artur Szeski, a banking analyst with CDM Pekao Securities.
Hunting for a new investor could take a long time, he said, and it is unlikely one could be found before Handlowy and BRE shareholders vote on the merger. Handlowy has an extraordinary shareholders meeting scheduled for Dec. 9 while BRE's is Dec. 10.
If PZU and the Treasury Ministry are successful in blocking the merger on merit alone, then both also stand to watch the value of their holdings slip.
According to CDM Pekao's Oct. 26 report, which looked at the merger at the current 2.4 to one ratio, Handlowy's share price should continue to trade at about zl. 59-zl. 60 per share, about 3% above the current price. At the same time, the management boards of the two banks have said that the cost savings and expansion prospects the merger would bring should hike the entity's share price by 20% by 2001.
"If there is no merger, the price should fall, probably down to zl. 47 per share," CDM Pekao's report stated.
