First Monday of April

The Malta Independent on Sunday

First Monday of April

The first Monday of April seems reserved for HSBC to announce important acquisitions. It was on 5th April of last year, Easter Monday to be exact, that Minister John Dalli announced to the Press that he had reached agreement for sale of Government`s 67.1% shareholding in Mid-Med Bank to a then undisclosed buyer which later resulted to be Midland Bank plc, now HSBC.

It was never explained why the Minister felt the need to make this announcement to the Press before he actually sought and obtained Cabinet approval for such a big decision. Cabinet approval was obtained on Tuesday 6th April in a rather short cabinet meeting which could not have provided the opportunity to examine the matter with sufficient detail that it deserved. There was speculation that the unorthodox announcement to the Press was meant to suffocate the expected resistance for the deal within the Cabinet, but such matters cannot of course be proven.

Similarly we would never know why the Government and HSBC included in their agreement a totally unheard of condition to procure the suspension of trading in Mid-Med Bank shares from the Malta Stock Exchange until the whole deal is concluded following a due diligence which had to take several months. Again one can be permitted to speculate that the intention was, and this was oft repeated by HSBC spokesman,` to use the period of suspension of trading to twist the arms of the minority shareholders to sell and therefore get the shares de-listed from the Exchange by turning Mid-Med Bank into a wholly owned subsidiary. This would have saved blushes for the Government and would have given a total bargain to HSBC.

A year almost to the day, on Monday 3rd April 2000. HSBC announced its success in beating ING ( of Barings fame) in the acquisition of a controlling shareholding in the 8th largest French Bank Credit Commercial du France regularly known as CCF. This is an important acquisition for HSBC as it gives the group its first significant retail banking presence in a continental Euro zone country. It is one of the largest trans-border EU acquisition in the banking sector and will surely set the pace for others.

Some comparisons between the two acquisitions, made on the first Monday of April distanced by one year,` would be appropriate.

Consider the price. HSBC paid for Mid-Med 1.53 times the book value and 9.5 times its realised price earnings. For CCF,` HSBC are paying 3.5 times its book value and 18 times its future anticipated earnings.

If Mid-Med was sold for 3.5 times its book value the share price would have been Lm6.61 rather than the Lm2.90 which the Government realised. This would have enriched the public coffers by no less than an additional Lm93 million, very badly needed to finance economic restructuring.` Much the same result would have been obtained if an 18 price earnings ratio would have been attached to future earnings of Mid-Med Bank given its impressive growth of profits and a return on equity ratio far superior to that of CCF.

The second comparison is that the shares of CCF were not suspended from trading for one minute. The announcements was made when the market was closed during the weekend and the market was allowed to regulate its own price levels.

The third is how in deal the parties negotiating the sale were assisted by expert investment bankers even though they themselves are not novices in this business. According to the Financial Times` CCF were advised by Morgan Stanley Dean Witter, Rotschild` & Cie, and CCF Charterhouse. A three pronged set of advisers with some of the best heads in mergers and acquisitions.` HSBC were advised by Goldman Sachs, the largest investment bank in the world, and by their own HSBC Investment Bank.

In the acquisition of Mid-Med Bank HSBC were advised by their own HSBC Investment Bank. The Malta Government was advised by no one.` Not only that` but Minister Dalli went on record stating that he had no detailed knowledge of the inside strengths of the Bank but still felt confident in concluding the sale single-handedly without any advice from anyone.

I have expressed my concern that the workings later published on which the Bank`s valuation was made have fingerprints of being prepared by someone who was more concerned to protect the interest of the buyer than` of the seller. Including a risk premium of 6% in the discount factor of the bank`s future earnings is not something any Government would do in negotiating a price for its prized Bank controlling 50% of the market. And if no one else was involved in the negotiations if it was not prepared by the seller it was prepared by or for the buyer.

The last comparison of the deals is that in acquiring CCF, HSBC was bidding in competition with ING who were already a significant though not controlling shareholder in CCF.` In case of Mid-Med Bank there was no competitive bidding and on the contrary the Malta Government incredibly bound itself in the confidentiality agreement not to make parallel negotiations with other interest parties.

These comparisons raise again the question as to whether future privatisations can be left in the hands of whoever messed up the sale of Mid-Med Bank so badly. At least not before a public apology is offered and signs of repent given for the gross mistakes committed.