Equity calls off Sh10bn plan to buy regional banks

Equity Bank Group #ticker:EQTY has called of its plan to acquire four regional banking subsidiaries from London-listed Atlas Mara Limited in a move aimed at preserving its capital in the wake of the Covid-19 pandemic.

The parties had initiated talks in April last year, but the negotiations targeting Atlas Mara’s units in Rwanda, Zambia, Tanzania and Mozambique dragged on until the pandemic hit.

This has worsened the outlook for the businesses at a time when Equity is also facing the twin challenges of navigating the crisis and raising $105 million (Sh11.1 billion) for a separate deal (purchase of a 66.5 percent stake in DRC’s Banque Commerciale Du Congo).

While the Atlas Mara deal was to be paid for through Equity shares equivalent to a 6.72 percent stake valued at about Sh10.6 billion, the loss-making subsidiaries would have needed substantial capital injection from the Kenyan bank.

“The reasons for this decision include the need to refine Equity’s strategy given the Covid-19 pandemic,” the Nairobi Securities Exchange-listed firm said in a statement.

“This refinement entails conserving cash and liquidity (including the non-declaration of dividend for the financial year ended 31 December 2019) and deploying it to support customers in existing businesses.”

The bank cancelled its proposed dividend payout of Sh2.50 per share or a total of Sh9.4 billion after the pandemic forced it to restructure Sh92 billion of loans to customers hurt by the economic disruption.

Completing the DRC acquisition and the Atlas Mara deal simultaneously while running its current six-market operations in a crisis environment would have strained the bank’s balance sheet.

The Atlas Mara transaction, in particular, would have taken long to pay off while requiring substantial capital support.

“We expect near-term increases in non-performing loans, customer withdrawals and other effects including yield and fee compression as central banks intervene and foreign exchange markets display extreme volatility,” Atlas Mara said in reference to the pandemic’s impact on its businesses.

“While there can be no certainty at this stage, we expect 2020 operating and financial performance to be negatively impacted in each of our markets.”

The Atlas Mara deal would have seen Equity acquire 62 percent of the share capital of Rwanda’s Banque Populaire du Rwanda and 100 percent of African Banking Corporation of Zambia, African Banking Corporation Tanzania and African Banking Corporation Mozambique.

The London-listed firm says it will seek another buyer for the four banks after the Equity deal collapsed.

“Atlas Mara remains committed to implementing the previously announced strategic decisions of the board, which include focusing on improving performance in core markets, streamlining the holding company structure and related costs and exiting or partnering in certain countries,” the multinational said in an update.

“The company continues to evaluate a number of options with the objective of completing when practicable a strategic transaction aligned with these objectives. The company will provide further updates to the market in due course.”

In its preliminary discussions with the Kenyan bank, Atlas Mara had agreed to reduce the value of the four subsidiaries by Sh11.2 billion to reflect their weaker earnings.

These banking units previously reported a return on equity (RoE) of approximately two percent. Equity, in contrast, has posted returns in excess of 20 percent in recent years.

Atlas Mara says the value of the four banks will be hurt further by, among other factors, weaker currencies in their markets.