Amcon announced it had selected Skye Bank as the preferred bidder for the acquisition of Mainstreet Bank in a deal thought to be worth about N120billion. In an ideal scenario this should have been a merger at most considering the similarity in size between the two banks. The difference here however, is that one bank is nationalised and the other is not which is a factor.
Despite this difference, one has to get a hang of how intricate this deal will be for Skye Bank considering the mooted purchase consideration relative to the balance sheet size of Skye Bank.
Therefore, a shareholder or intending shareholder of Skye Bank who has the most stake in the deal should be concerned about how the bank intends to pay for this deal. Here are a few scenarios. [upme_private]
Pay Via Debt – Skye Bank can issue bonds in the capital market or via Eurobonds as many of its competitors have done. However, Skye Bank is highly leveraged already with over N128.9billion in foreign loans already on its balance sheet making a straight debt funding highly unlikely. Skye Bank has net assets of about N116billion which already stretches its debt to equity ratios a clear signal that the bank is off-limits.
Pay Via Equity – Skye Bank can also fund this transaction via a rights issue or even a public offer should the current shareholders funds not be enough to garner the needed capital. This appears the logical step to take but the size of money they need to pay for Mainstreet Bank makes this an onerous task. Diamond Bank for example has raised N50.7billion a few months ago and Access Bank is already billed to raise N68billion. Skye Bank will likely need about N80billion if it is to fund this transaction solely via Equity. Is Skye Bank that attractive to raise N80billion this year??
Debt to Equity – A hybrid of debt and equity is also an alternative source of paying for Mainstreet Bank. This will involve raising additional debt and new equity which looks logical in the scheme of things. A N50billion rights issue and a N30billion bond should help reduce its gearing ratio post Mainstreet acquisition.
Finally,
Time is running out for Skye Bank as it faces a dual hurdle of completing the deal on time and shoring up its Tier 1 capital as stipulated by the new CBN guidelines. For shareholders, whatever decision the bank makes now is bound to affect its share price going forward. The bank has shed 28% in the last one year even though the announcement of the deal has shored its share price a bit higher. [/upme_private]