NDB Investment Bank, (NDBIB) in an independent opinion on the joint mandatory offer by the People’s Bank and People’s Leasing and Finance PLC (PLC) to purchase all the remaining ordinary shares of People’s Merchant Finance PLC (PMB) has advised that the offer price of Rs. 22 per share is not attractive to shareholders of PMB and has recommended that they should not accept it.
The offer was triggered by the People’s Bank and PLC together acquiring almost 6.5 million shares (9.75%) of People Merchants Finance at a price of Rs.22 per share on July 3 this year.
Currently the joint offerors with slightly over 32.9 million shares hold 48.77% of PMB. The recent acquisition triggered the joint mandatory offer requirement of the SEC’s Takeovers and Mergers Code with the Rs.22 price now offered being the highest they, acting in concert, have paid for PMB shares within the previous 12 months.
The Takeovers and Mergers Code requires that an independent opinion on the offer should be made available to shareholders of companies being taken over or merged to assist them to take a decision on whether they would retain their shares or sell out.
The People’s Bank is one of the largest commercial banks in the country with over 13 million customers - the largest customer base of any bank in the country. People’s Leasing and Finance (PLC) is the country’s largest finance company with an asset base exceeding Rs. 100 billion with approximately Rs. 35 billion in customer deposits.
PLC currently operates five subsidiaries and is active in business segments including insurance, finance, micro finance, fleet management and property development. As a subsidiary of the People’s Bank, it enjoys government protection along with private sector flexibility.
Currently the People’s Bank is the top shareholder of PMB with 30.93% followed by PLC with 17.84%, the Capital Trust Group (22.1%) and other shareholders (31.02%).
PMB has run up losses of Rs. 91.4 million after taxes in 2012/13, Rs. 219 million in 2013/14 and Rs. 104.9 million (unaudited) up to December 31, 2014. As at December 31, 2014 PMB’s total assets exceeded Rs.4.9 billion whilst its total liabilities stood at approximately Rs. 4 billion.
NDBIB has calculated the net asset value of PMB at Rs. 13.9 per share and said that the Rs. 22 price offered represents a premium of 56.7% to the net asset value per share.
With a price to book value ratio (median of the identified peer companies as at March 31, 2015) they have estimated the value of an ordinary PMB share at Rs. 25.12 and said that based on this valuation Rs. 22 price offered by the joint offerors represent a discount of 12%.
The NDBIB opinion states that the share price of PMB has largely remained below the offer price since January, 2012 and liquidity too has been low. With a favourable swing in momentum seen in the ASPI during mid 2014, the PMB share too had moved accordingly and had been thinly trading above the offer price.
With the uptick in the ASPI last year, the price of the PMB share has remained largely above the offer price since April, 2014 and weighted average price to date for the period ended July 2, 2015 was Rs. 24.93.
"Therefore, the offer price of Rs.22 is at an 11.74% discount to the weighted average market price," the opinion said.
It also made the point that with the joint offerors emerging as the single largest shareholder group of PMB, it can be expected that the company would be better positioned to draw on the strengths of its parent company. This may potentially result in the ability to mobilize deposits at a faster pace when compared to peers while being able to leverage on available expertise in order to achieve growth in lending assets.
"Hence, PMB may be able to generate above average growth and deliver attractive returns to its shareholders in the medium to long term," the opinion said. Also, the emergence of a controlling shareholder of PMB would enable prompt and smooth execution of new business plans which may potentially enhance the value of the company.
NDBIB has also said that with Sri Lanka having over 40 registered finance companies in operation, there was stiff competition for deposit mobilization and lending products. This situation, in the absence of financial sector consolidation may lead to lower net interest margins and higher marketing costs in order to grow businesses.
"This may potentially result in PMBs turnaround strategy being prolonged and investors having to be patient until the company returns to profitability and is able to generate adequate shareholder returns," the opinion said.
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