Bank of Cyprus board to review new Piraeus deal

The board of Bank of Cyprus Pcl (BOCY) is meeting today to discuss various options regarding friendly overtures from Piraeus Bank and a widely leaked letter sent by the Greek bank outlining the advantages of a possible cooperation or merger between the two.

Bank of Cyprus officials told the Financial Mirror that “there is no specific offer on the table” but confirmed that the contents of the letter sent by the Vice-Chairman of Piraeus (TPEIR) will be discussed.

Meanwhile, the Chairman of TPEIR, Michalis Salas told Greek reporters that he is expecting a final decision from Bank of Cyprus, the “latest by Monday,” without elaborating further.

 

— Advantanges, but no premium

According to press reports, TPEIR vice-president Michael Kolakidis summarized the key advantages of a possible strategic cooperation between the two banks as follows:

• The formation of the second largest banking group in Greece and Cyprus and one of the largest in south east Europe and the Eastern Mediterranean. The combined group’s total assets would be EUR 55 bln, while total loans and deposits would reach EUR 36 bln and EUR 38 bln, respectively.

• Both BOC and TPEIR boast high growth rates and development prospects in the countries they operate.

• The 2006 net profit of both banks is expected to reach a total of EUR 700 mln. Further earnings growth is anticipated as TPEIR has broadened its presence in SE Europe, via its network of 200 branches.

The combined group will have a leading presence in Greece and Cyprus and also a strong presence in developing countries such as Albania, Bulgaria, Romania, Serbia, Russia and Egypt, as well as in countries with large Greek communities such as the UK, USA and Australia. The total combined branch network will reach 820 branches (530 TPEIR, 290 BOCY).

Other advantages include cost synergies in the Greek market as well as their complementary branch network in other countries, while according to Kolakides, the current legal entities will keep their separate corporate identities maintaining their own boards.

An informed source at Bank of Cyprus told the Financial Mirror that while all the above appear good on paper, “it does not answer the key issue of how the interests of Bank of Cyprus shareholders will be protected and whether or not they will get a fair value for their shares.”

 

— Various options

 

The key issue is to maximise shareholder value and in most likelihood any offer from TPEIR for a merger is likely to be centred on a share swap. Since the price to book value of TPEIR is at least 10% more than that of BOCY, the question is in what ratio a swap offer will be based and if BOCY shareholders will agree to exchange their shares for a higher value share price which basically reflects the same size operations.

The next issue to be considered is the composition of the TPEIR profits and how much originate from core banking operations and how much from trading, something repeatedly stressed by BOCY CEO Andreas Eliades when explaining the composition of BOCY profits, the bulk of which originate from core banking operations.

There are also reports that TPEIR has under-provided its bad debts, a serious issue that needs to be carefully examined before any sort of cooperation is discussed.

Bank of Cyprus board members will also have to consider justifying a sell-off of the bank’s operations in Greece in exchange for shares, instead of insisting for a cash bid at a 20-30% premium.

TPEIR is making overtures to Bank of Cyprus talking about cost synergies and autonomous boards but the crucial issue for every BOCY shareholder is “since we are doing well in the present form and under current management, why risk it all and at the same time get no premium.”

If TPEIR addresses the issue of a share premium, then ultimately the whole approach could change, but until then, Cyprus shareholders are likely to react coolly to such overtures from TPEIR.

 

— Share pressure

 

Meanwhile, analysts are surprised at the urgency with which TPEIR is rushing to close a deal, considering that the bank’s Chairman, Michalis Salas, had previously said that they would wait until January before deciding on their 8.2% holding in Bank of Cyprus.

By making small sales at EUR 10 per share, TPEIR has effectively placed a cap on the share price of BOCY and if this was to continue well into 2007 and in the meantime the share price of Marfin Popular Bank was to edge from the current levels of EUR 7.4 to EUR 10 per share, then ultimately, the mood among BOCY shareholders would change.

BOCY shareholders are also likely to blame Salas for holding down the share price and turn against him, if the sell tactics at EUR 10 per BOCY share was to continue for much longer.

“The urgency means that Salas wants to close this issue even sooner than many people think, probably because a big part of the capital of TPEIR is now tied up with the BOCY investment and probably is a deterrent to their expansion plans in other countries,” said an experienced analyst. The other alternative would be for TPEIR to place the 8.2% stake in BOCY among institutional investors and walk away with as much as EUR 100 mln in profits.