- POSTED: 07 Jan 2014 23:27
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Fears that OCBC Bank may overstretch its resources to win the bid for Hong Kong's Wing Hang Bank continue to weigh down investor sentiment. The Singapore lender extended its downward slide on Tuesday, losing 1.2 per cent at the close of trading.
SINGAPORE: Fears that OCBC Bank may overstretch its resources to win the bid for Hong Kong's Wing Hang Bank continue to weigh down investor sentiment.
The Singapore lender extended its downward slide on Tuesday, losing 1.2 per cent at the close of trading.
The counter fell to a six-month low on Tuesday since OCBC confirmed on Monday evening that it was in exclusive talks to buy Hong Kong's Wing Hang Bank.
Still, OCBC believes that China is an attractive market.
"Greater China presents excellent prospects for OCBC as China increasingly becomes the driver of economic growth in the region, and its interconnectivity with the rest of Asia and the world in trade, wealth and capital flows have created significant business activities in the Greater China region," said OCBC Chief Financial Officer Darren Tan in a statement to the media.
He added: "Both Taiwan and Hong Kong are important parts of our Greater China strategy, with Hong Kong being a de-facto gateway to China and the offshore yuan clearing hub playing a strategic role. We will continue to deepen and grow our presence in Greater China."
OCBC just needs to seal the deal with Wing Hang's substantial shareholders - Hong Kong's Fung family and the Bank of New York Mellon.
And if this happens before their exclusivity agreement lapses at the end of this month, OCBC will be obliged to make an offer for all the shares of Wing Hang.
Kenneth Ng, head of Singapore research at CIMB, said: "Any bank that wants to buy the 45 per cent by these two shareholders would likely put in a bid contingent on securing a significant percentage above that. And on that count, they'll probably be willing to pay 20, 30 or even 40 per cent control premium for the bank."
CIMB said this would work out to a bid of around 1.7 times book value, roughly S$5 billion (US$4 billion).
A bid of that size will deplete OCBC's funds, and bring its capital ratios below levels set by Singapore's central bank.
In this case, analysts said the bank will need to finance the acquisition with some form of share issuance or share swap.
Jack Wang, partner at Lexico Advisory, said: "If the payment on the acquisition is not 100 per cent cash; it's a mix of cash and equity - I'd imagine OCBC would be a much more attractive business partner. For the family controlling Wing Hang, it probably makes more sense for them. If they are going to take equity, OCBC would be a very good piece for them to add into the family business. It's a good stock, and probably undervalued, compared to the Hong Kong market's valuations."
If OCBC raises funds through share issuance in the market, this could dilute the value of OCBC shares held by existing shareholders.
As a result, some investors have exited the counter to avoid any potential loss in share value.
Wing Hang's stock ended 1.5 per cent higher on Tuesday.
But now that OCBC is the sole bidder at the table, analysts said OCBC could have more bargaining power.