Are investors getting a bargain with Eurobank?
The Hellenic Financial Stability Fund (HFSF) said on April 15 it approved the 1.33-billion-euro offer submitted by a consortium of investors for Eurobank’s capital increase. The approval signals the completion of the first (cornerstone investor) phase covering 46.5 percent of the announced equity raising of 2.86 billion euros.
The group of investors includes Fairfax, WLR Funds, Capital Research and Management Funds, Mackenzie Funds, Fidelity Funds and Brookfield. The bulk of the offered amount stems from Capital (557 million) and Fairfax (400 million).
Fairfax and WLR Funds have committed to a 6-month lock-up period and have also declared their intention to actively participate in Eurobank’ corporate governance.
The capital injection of 1.33 billion euros makes those anchor investors Eurobank's second largest shareholder, controlling a stake of 29.6 percent.
The next phase involves an international offering via a private placement through a book building process, reportedly scheduled for April 25-29, and a public offering in Greece. Both transactions aim to raise the 1.53 billion euros not covered by the anchor investors.
According to the new bank recapitalisation legislation, should private investor participation cover 50 percent or more of the total capital increase, the HFSF will have restricted voting rights on the shares it already owns. The HFSF has also committed to a 6-month lock-up period if this situation arises.
The HFSF became Eurobank’s dominant shareholder, controlling a stake of 95.2 percent, after it fully covered its capital needs of 5.84 billion last year. In case private investors fully cover the capital increase of 2.86 billion, HFSF share will be diluted to 34.7 percent, remaining above the critical threshold of 33 percent.
Of more significance, though, is the price of 0.30 euros offered by the anchor investors. This is equal to the nominal share value, also set as the minimum acceptable price for the capital increase.
This price implies an 80 percent discount on the 1.54 euros per share that the HFSF bought the Eurobank shares last year.
From a valuation perspective and assuming that (new) private investors fully cover the whole amount of the capital increase at a price of 0.30, this would result in a 28 percent dilution of the tangible book value per share (TBV) to 0.39 euros from 0.54 in 2013. The former (0.39 euros) incorporates the capital enhancement and the new shares to be issued, while the latter (0.54 euros) takes into account figures reported in 2013.
Based on the April 15 closing price - the last before HFSF's announcement - of 0.406 euros, this means that the stock is trading 1.05x its 2013 pro-forma (for the capital increase) TBV compared to 0.75x its 2013 reported TBV. For new investors that will acquire shares via the capital increase process at a price of 0.30, the respective price-to-book value (P/TBV) stands at 0.77x.
If one could argue that a fair value of Eurobank shares would be trading at a 1x TBV, this would translate into a share price of 0.39. That price and valuation implies a 33 percent theoretical gain for new investors.
Although this would signify a significant profit, it is way below the 100 percent potential gain suggested by some commentators, which was based on the same price assumptions. Note that similar conclusions could be drawn if the previous calculations are based on the BV rather than the TBV.
*Manos has years of experience in the Greek financial sector. Since 2000, he has served as senior bank analyst at ex-P&K Securities and investor relations officer at Eurobank. Manos worked as head of equity research at Euroxx Securities, the largest non-banking brokerage firm in Greece. You can follow Manos on Twitter: @ManosGiakoumis
An excellent translation of Stefanos Manos article can be found at this link, titled "The Dizzying profits of the Eurobank sale: this is how money is made in Greece today".
I prefer to ask if greek taxpayers are getting a bargain!
Here is a (roughly translated) comment from Stefanos Manos at capital.gr 15/04/2014:
"The aim of the government and HFSF is a 3 billion increase in the share capital of Eurobank. To increase the attractiveness...the government legislated that new shares may be offered at a price lower than the market price, ie a value corresponding to a P / B 0,500. According to this legislation the HFSF, which holds 98% of of Eurobank shares, is not entitled to participate in the capital increase .
With these conditions it is anticipated that the increase will be successful. The HFSF will no longer be a major shareholder of Eurobank and will not be able to recover the capital initially placed in the Bank. The damage that will occur will be borne solely by the taxpayers.
What will investors get from their 3 billion investment?
They acquire a majority with P / B 0,5000 and the bank with fresh 3 billion will be more than well capitalized. Investors can reasonably expect that within a few months P / B shares will reach the levels of other banks. I.e. between 1,000 and 1,300 or more. Within months 3 billion will be 6, 7 and more billion.
With the approval of the House, the blessings of the Ministry of Finance and the HFSF, they will set up a secure and dizzying wealth. A system into which only a few elite can participate. It is extremely difficult to believe that the leadership of the HFSF does not understand this outcome. So why then does it make such an arrangement ?
What should be done? The FSF should take the increase entirely . It has the money and should have the profits described. [Benefitting taxpayers].
I have ceased to hope that Greek society has the reflexes to stop such phenomena dizzying wealth and for this I have stop and write. Let this text stand as a prediction of what will happen with the attempted PRM of Eurobank. For those who will say " I did not know ."
I hope the media devotes so