INF stake in Hellenic may come into play
Proton Bank of Greece is seen closing the net on Hellenic Bank, judging from the direct and indirect stake it has accumulated in HB, as well as intense reports from Greece that it is interested in taking control of Cyprus’ third largest bank.
Adding to the speculation were the comments by Hellenic’s CEO that “the bank is open to any type of cooperation aimed at boosting shareholder value.”
Proton, which is reported to have built up a direct stake of 1.4% in the share capital of HB, has been busy boosting its stake in Interfund (INF), the CSE listed investment company, which itself has built a sizeable stake in the capital of Hellenic, using a loophole in the regulations governing the operation of approved investment companies.
Records submitted by INF at the CSE show that Proton Bank lifted its direct stake in INF from 12.4% at the start of the year to 18.4% by June. The other major shareholders of INF, the Cyprus Development Bank and the Cyprus Airways Pilots Unions, maintained their ownership levels at 8.55% and 5.58% respectively.
Loophole
A Financial Mirror analysis showed that by the end of June 2006, INF held 5.760.000 shares of HB representing 21% of its assets and 4.155.000 warrants of HBEW representing a further 7.4%, for a total stake of 28% in a single CSE stock, which under the original rules governing the operation of approved investment companies was prohibited.
A loophole in the law, however, gives INF all the right to do so, based on a recourse filed by Triena against a SEC fine for exceeding its investment limit in SFS shares. The Supreme Court ruled in the Triena vs. SEC case that the imposition of investment limits was unconstitutional.
The SEC has appealed the ruling, but pending a final decision has decided to refrain from enforcing the law according to which, an approved investment company may not exceed 10% of its assets in a particular investment, and only in the case of the banks, it may do so up to the share of the market cap of the particular bank to the total market cap of the CSE.
Thus an investment by INF in HB should be at a maximum up to 10% of its assets considering that HB’s share of CSE market cap is only 6%. According to the SEC, if the Appeals Court rules in favour of the SEC, then approved investment companies like INF will have to reduce their stakes in HB. But until then, they are free to hold such stakes.
INF warrants
Additional changes to the INF share ownership may emerge on paper at least through other means. The first scenario refers to the buyback scheme now in progress for the purchase of up to 10% of the share capital in 12 months.
In theory, if the 10% of INF is purchased under the buyback and subsequently the shares are cancelled, then the stake of Proton in INF will increase to beyond 20% on a permanent basis. Naturally, this will pave the way for further acquisition up to 30%, which is set to go through with the new legislation due on M&As (which will revoke Article 28).
The second scenario refers to the 15.8 mln warrants (vs. 157.7 mln shares) that may be exercised every October in 2006 and 2007 at a 40% discount compared to the average price of the 15 previous days at a minimum conversion price of the nominal value of 10 cents.
Interfund
The 5.76 mln shares of HB held by INF represent 2.4% of the capital of Hellenic Bank and is a significant stake when combined with the direct 1.4% stake held by Proton in Hellenic.
If Proton was to assume control of INF or make a direct bid to purchase the shares from INF, then it would lift its stake in HB close to 4%. And if the HBEW held by INF, which are American-type warrants and may be exercised at any time are converted, then that would give an additional 1.1% stake when all warrant holders of HB do exercise and 1.6% if the other HB warrant holders do not exercise.
Thus the INF shares and warrants held in HB may add up to 4.1%, which combined with the direct stake held by Proton could exceed the 5% threshold.
HB comments
Comments made by HB CEO Makis Keravnos during the presentation of the first half results on Monday that the bank is open to all types of cooperation aimed at serving shareholder interests, for some may mean nothing, but for others may mean a lot.
The term ‘boosting shareholder value’ has often been used by Marfin Vice-Chairman Andreas Vgenopoulos to explain why shareholders are more likely to join forces to oblige Management to speed up changes towards boosting profit and hence the share price for their interest.
Put differently, the term may also indicate that major shareholders are more likely to agree to a bid by a third party to exit from a position which ties up their capital and is not producing a satisfactory return.
The recent deal whereby BOC agreed to sell its stake in Universal Life Insurance Co. to Andreas Georghiou and Photos Photiades Group is a classic example that old alliances are crumbling with the tacit approval and encouragement of the Central Bank and that banks are obliged to look after their shareholder interests.
If the intensity of the Greek press reports speculating about a move by Proton on Hellenic Bank is another guideline, then it appears that the major shareholders of HB, which are BOC, CPB and UL in addition to the Church, may show no hesitation to sell their shares, if the price is right and it serves their interests.
