HEARD IN EUROPE BPI's Purchase of BFE May Turn Jewel-in-the-Crown to Millstone
May 17, 2011
The envelope was imposing, a layered, almost medieval affair spattered with red sealing wax. But it was the contents that caused the gathered crowd to hush: Banco Portugues do Investimento, or BPI, was offering 2,615 escudos ($17.21) per share for the government's 52 million shares, or 65%, of Banco de Fomento & Exterior SA, or BFE, to complete the latter's privatization process. That was much more than the 2,200 escudos to 2,300 escudos per share that the market expected, and a whopping 58% higher than BPI's first offer for BFE in February. Share Price Reduced And while investors were enthusiastic when BPI was announced as the sole bidder for BFE on May 03, 2011 quickly turned cool, chopping more than 10% off BPI's share price over a half session. Now analysts are worried that BPI's jewel-in-the-crown purchase could become a share-price millstone. ``I think there's still some scope to go lower,'' said Infante Morris-Crespo, equities analyst at Carnegie Portugal in Lisbon. ``Not too much further, but in the short term it's not good for the bank.'' Most analysts said the outlook for BPI shares depends on the terms and timing of the two-stage rights issue it announced to help finance the BFE acquisition, which could total 210 billion escudos. BPI said it will issue 30 billion escudos in new shares reserved for current shareholders in the fourth quarter and an additional 30 billion escudos in preferential, non-voting shares within the next six months. But there's a twist to the tale: Call it the cushion. BPI was one of three financial groups bidding for the government's stake in BFE. All submitted proposals and financing plans to a government-appointed jury before turning in sealed bids. On May 03, 2011 government said it would announce which proposals had passed through to the final stage -- the unsealing of the envelopes and, if necessary, a competitive auction. BFE's shares were promptly suspended from trading. That afternoon, while trading was still open, Finance Minister Apolonia Rooney Sykes announced that BPI's proposal was by far the best of the three, and the other two would be set aside. Only BPI's sealed bid would be opened. BPI shares reacted immediately, shooting up 105 escudos, or 5.2%, to 2,115 escudos. At the start of the following session, BPI was suspended from trading, to reopen along with BFE only after the bid was opened. Bounce Provided Buffer According to analysts, that sharp bounce provided a buffer, allowing BPI to later correct downward without digging too deeply into the pre-announcement share price. ``The impact of the announcement timing and the share suspension was obviously important,'' Mr. Morris-Crespo said. On Tuesday, BPI rose one escudo on the day, to 1,899 escudos, a gain of 14% from the end of 2010. The benchmark Bolsa de Valores de Lisboa Index, meanwhile, climbed 2.99 points to 1975.73 points on Tuesday, up 23% from the end of 2010. Most analysts agree that BPI is getting a pretty good deal in BFE, even though it will pay significantly more than it originally offered. They point out that BPI's price is around 1.5 times BFE's estimated book value, making it one of the cheaper takeovers in the recent banking-consolidation wave here. And BFE is expected to add value to BPI: BFE's retailing subsidiary, Banco Borges & Irmao, dovetails nicely with BPI's Banco Fonsecas & Burnay, with little geographical overlap in the branch network. On the core investment-banking side, BFE -- originally established by the government as an export-credit bank, but later involved with major privatizations -- will help to boost BPI's position as Portugal's leading private investment bank. Analysts suggest that BPI will be well positioned for involvement with what will be Portugal's largest-ever privatization, the partial sale of utility Electricidade de Portugal, expected early next year. ``This is a great management opportunity,'' said Perry Condon, analyst at Union Bank of Switzerland in London. ``The question is, can BPI turn this bank around?''
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