Fidelity Bank Plc informed investors it has agreed to buy 100% of Union Bank UK, a subsidiary of Union Bank Plc which earlier in the year was acquired by Titan Merchant Bank.
According to Fidelity Bank’s Managing Director/Chief Executive Officer Mrs. Nneka Onyeali-Ikpe, the transaction aligns with their strategic plan of “expanding” their service touchpoints beyond the Nigerian market and providing straight-through services that meet and exceed the needs of our growing clients” which they acquisition will help support.
The companies are yet to disclose the purchase consideration, but we anticipate this will be revealed sooner, rather than later. While we wait for the actual cost of this transaction, the last audited accounts of Union Bank provide a fair idea of what Fidelity Bank could be paying for.
At the end of its audited financial statement for 2021, Union Bank reported it had discontinued operations of its UK subsidiary as it prepared for a potential sale. The UK subsidiary has been reporting losses since at least 2019 and Nairametrics estimates a total loss of over N17.9 billion between then and 2019. The UK Branch’s net assets as of December 2021 have also gone from about N27 billion in 2018 to about N18.9 billion as its assets continued to deteriorate.
Being a loss-making company, a likely methodology for estimating the value of the company will be to apply valuation multiples to the current value of Union Bank UK’s net assets. Assuming a valuation multiple of 3x (which is top of the range) will value the company at about N56.7billion. However, valuation multiples for Nigerian banks are below 1x or at best 2x. Using 2x will likely price the acquisition at about N37.8 billion.
Another valuation metric might be to look at Union Bank and its current net assets which is currently N273.5 billion. Union Bank UK is therefore 7% of the value of the assets of Union Bank Plc. Union Bank in total has a market value of N163 billion thus by extension, the UK can be valued at no more than N11 billion. Applying a price multiple of 2x will also value this at about N22 billion.
These are mere guestimates as valuation is a combination of financials, sentiments, and qualitative values. However, we do not expect Fidelity Bank to pay over the top for an asset that is loss-making. Acquiring Union Bank UK if approved, gives Fidelity Bank direct access to the UK market which would be difficult if they were to apply afresh. However, this should be done prudently and responsibly.
Fidelity Bank’s market valuation is currently N92 billion which is around 29% of its book value. In terms of Net Assets, Fidelity Bank is worth around N311.7 billion more than 15x the value of Union Bank UK. The company’s share price has risen 47.9% in the last year possibly due to its impressive business performance or plausibly in anticipation of this deal. Whatever the case is, the success of this acquisition will lie in Fidelity Bank being able to turn this company into a profitable entity within two years.
It costs money to make money.
The more poignant consideration is, not looking at this UK subsidiary in isolation (or as a stand-alone entity), but whether there’s synergy, with the WHOLE (group) being greater than the individual sum of the parts (the subsidiaries). In effect, does it make the entire GROUP more valuable.