Friday, 18 February 2005

So much by so few for so many

 The Malta Independent - Friday Wisdom

This sparked in my mind last week, when HSBC Malta announced an annual profit before tax of Lm33 million for 2004 and the share price exceeded Lm9, leading the bank to propose a share split to bring its unit price down to more popular levels.

The market capitalisation of the bank has now exceeded Lm328 million, of which 30 per cent, ie just under Lm99 million, is held by private investors and is traded on the Malta Stock Exchange. When the sale of Mid-Med Bank to HSBC was announced, the clear and stated intention was for HSBC to acquire this 30 per cent equity stake in the bank which the
Malta government could not procure and sell. The offer made to the shareholders was then valued at less than Lm32 million.

The private shareholders could not be forced to sell, but moral pressure was put on them to coax them into compliance with HSBC’s wishes. The most obvious of such moral pressures was the closure of the market for the bank’s shares during the whole period of due diligence – from
5 April 1999 till 2 June 1999.

During this period, especially in the first month thereof, various public statements were made by HSBC officials, reiterating their intention to acquire the private shareholding on the same price and terms agreed with the government, and suggesting that private shareholders should re-invest the proceeds in shares of the HSBC parent. Private discussions I had with such officials at the time left me in no doubt that HSBC were planning to acquire the entire shareholding and then merge the local outfit into the parent organisation.

It took five gentlemen, your truly included, to defend the interest of the private shareholders – firstly by giving them a unified voice when they were at a loss to understand what was going on around them, and then to defend their case, even in court, until HSBC changed its strategy and agreed that small shareholders would be welcome to stay on.

These shareholders, or their successors in title, today are collectively Lm67 million richer, apart from the dividends earned in the meantime, because five of us defended their case with zeal and determination at a time when it was difficult to find a lawyer ready to take up our case in court and when stockbrokers were unwilling to join us in a front to defend the interest of their clients.

Rarely, out of war, have so few done so much for so many. Their efforts should not be forgotten and I salute my colleagues Bonnett, Borg Bartolo, Sammut and Vassallo, as well as Dr Toni Abela, for having the courage to join me when many others of faint-heart had refused, putting self-interest before the common good.

Turning back to the present reality, the government is in the process of selling its last chunk of shares in Bank of Valletta (BOV). As a result, the BOV share price shot up throughout last year and has continued to do so this year, reaching a price in excess of Lm5 which gives it a stretched price earnings multiple of 24 on 2004 historical earnings, whereas HSBC at Lm9 is just at 15 times earnings.

Such a high earnings multiple in BOV share price can only be justified if investors expect BOV operating profit to explode, somewhere near doubling last year’s profits, as a result of cost cuts that will be made by the new strategic partner and the freedom to reduce provisioning levels for bad and doubtful debt after the bank finished a multi-year plan in 2004 to make up for past deficiencies in such provisioning levels.

Both assumptions seem loaded with undue expectations. While one can justifiably expect an improved operating performance, expecting and pricing a doubling in profits in the current share price seems a self-destruct prophecy. This is because if cost cuts can be expected to be found via the new strategic partner, by integrating the bank into its global systems and thus saving on the unavoidable high overhead structure of a stand-alone bank, by raising the share price in anticipation thereto, investors are probably creating a barrier to the interest of any serious global bank in buying into BOV at such a loaded price.

While this time, thankfully, the Stock Exchange has not closed the markets on the flimsy pretext that there is still uncertainty over whether the privatisation of the last chunk of government’s share in BOV will go through or not, this does not mean that investors will not act irrationally and rush into bidding up BOV shares to a price level which would kill any interest that serious global banks might have had in looking at the possibility of buying themselves a strategic equity position in BOV.

And without such a strategic partner, the huge premium built into the price to account for the cost-saving that such a strategic partner can deliver will be unjustified and will eventually be reflected in a downward adjustment of the BOV share price.

I regret spoiling the fun for those private investors who think that BOV privatisation can be a re-run of the happy experience of the Mid-Med Bank/HSBC private shareholders. The analogy simply does not pass the test of reality. Mid-Med’s share price was frozen by market closure at a low level, expecting HSBC to swoop the whole shareholding packet so the market would not need to re-open.

This was averted by the courageous act of the few for so many. BOV’s share price has sky-rocketed beyond reason in a market that has correctly been kept open, making the success of the sale to a strategic partner that can add value (which is under-pinning the share price explosion on the market) more and more like an unreachable hypothesis.

Investors who are coming late for the Bank of Valletta share party, which has been going on for some two years, should watch out against irrational behaviour which could harm so many by the acts of so few.

No comments:

Post a Comment