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End of the road for Lone Star bid?

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US private equity firm Lone Star seems to have abandoned its interest in local lender Bank of Cyprus and will not be submitting a fourth takeover bid by Friday.

LSF XI Investments LLC (Lone Star) informed the London Stock Exchange on Tuesday that it does not intend to make an offer for Bank of Cyprus, much to the relief of the bank’s board that had resisted three earlier offers.

The bank’s board and management said the Texas-based firm’s three earlier proposals “fundamentally undervalued the company and its future prospects.”

However, according to Rule 2.8 of the Irish Takeover Rules, Lone Star may defer its decision for a further six months.

The bank’s board said in a statement that it remains committed to becoming a sustainably profitable institution.

Bank of Cyprus updated its medium-term strategic targets in February this year and upgraded its expectations in May and again in August, including delivery of a return on tangible equity of more than 10% in 2023 and a return to “meaningful dividend distributions” from 2023 onwards.

One of its priorities is to further cut the workforce, that was reduced by about 550 voluntary redundancies to 2,872 following a generous exit package that included a one-off tax-free payment of up to €200,000.

The Financial Times reported earlier this month that despite seeing three cash offers rejected by the board and scepticism from financial authorities, the fund appeared determined to push for a deal to acquire the bank.

Visit to Cyprus

Lone Star representatives had been in Cyprus to convince authorities that their investment strategy in the domestic banking system is not an opportunistic venture. They had reportedly cited the firm’s participation in the share capital of two major European banking institutions, German IKB Deutsche Industriebank AG and Portuguese Novo Banco SA.

Lone Star acquired the majority of the shares in both financial institutions when the banks had been placed under a restructuring regime.

Stakeholders told Lone Star that the acquisition of a banking institution primarily concerns the members of its management and, by extension, its shareholders.

“No doubt Lone Star had noted Cyprus has stabilised. System-wide bad loans have fallen 78%, about EUR 7 bln lower, in the past five years. As a share of gross loans, NPLs stood at 11% systemwide. Bank of Cyprus, with 40% of the loan market, has done better getting its ratio closer to 6% at the end of June,” the FT report said.

“A rebound in economic growth should mean real GDP expands by 4.5% this year. While some links with Russian businesses linger, these now only account for about 2% of outstanding loans,” the newspaper added.

Local financial authorities were also not on board with the takeover.

Concerned over the possibility that a major banking institution could end up in the hands of a private equity fund, the Ministry of Finance submitted a bill to parliament this week to establish a framework for controlling foreign direct investments.

This law incorporates into national law the relevant regulation issued by the EU concerning the control of foreign direct investments within member states.

The majority of EU member states have implemented this law since 2019.

It gives governments the right to assess whether a direct foreign investment is likely to affect the security or public order of the Republic of Cyprus and whether the company in which the FDI is planned operates in sensitive sectors, including systemic credit institutions.

The bill will be on the House’s Finance Committee agenda on 29 September 29.

Three attempts

Within two months, the American fund submitted three proposals for acquiring the Bank of Cyprus, which were unanimously rejected by the bank’s board.

Lone Star, which invests in real estate, equity, credit, and other financial assets globally, said it offered EUR 1.51 per share for the bank, meaning the takeover would cost EUR 727.25 mln.

Shares in the bank were worth EUR 1.25 at the time of the previous offer.

On Tuesday, the BoC share was trading at EUR 1.31 on the CSE, unchanged from a week ago. On the London Stock Exchange it was trading at GBP 1.15, having peaked at 1.27 on September 21.

Lone Star’s first offer was made at the beginning of May, with a price of EUR 1.25 and the second at EUR 1.38 per share.

Bank of Cyprus currently has a market cap of EUR 584.5 mln.

According to Irish regulations, Lone Star had until 30 September to file a new offer, as Bank of Cyprus Holdings Plc was incorporated in Ireland in 2016 to list on the London Stock Exchange. It was first quoted at GBP 297.50 on January 14, 2017.