KCB to sink in Sh7.5bn to shore up NBK capital, fund growth

KCB Group, #ticker:KCB the country’s largest bank, has made an offer to fully acquire capital-starved National Bank of Kenya (NBK) #ticker:NBK in a share swap deal valued at Sh6.6 billion.

NBK, which has fallen short of most of the minimum capital requirements, will end up with a 4.5 percent stake in KCB, according to the deal terms.

KCB chief executive Joshua Oigara told the Business Daily that the lender plans to eventually merge its operations with those of NBK when the deal is completed.

“We will in the short term extract synergies and build on our unique strengths. We will ultimately consolidate our operations,” he said.

He added that KCB may need to invest up to Sh7.5 billion in NBK to shore up its capital and fund its growth. The planned merger is also expected to yield significant savings from a review of operations.

Both banks have a combined workforce of 6,400 in Kenya and operate branches close to each other in multiple locations.

The deal is expected to be completed by July, subject to approval by shareholders of the two institutions.

The transaction is expected to gain support from the government, which is a shareholder in both lenders and has long sought the merger of State-controlled banks.

The transaction will proceed if NBK shareholders holding a combined 75 percent stake accept the offer by KCB, which plans to de-list the smaller bank from the Nairobi Securities Exchange (NSE).

KCB has proposed that NBK’s 1.1 billion preference shares –which have a higher priority claim on the company’s assets and earnings than ordinary shares— be converted into ordinary shares at a ratio of one- to- one.

This will raise the volume of issued ordinary shares to 1.4 billion, which will then be divided by ten to arrive at the 147.3 million new shares that will be issued by KCB.

The preference shares are held by the government and the National Social Security Fund (NSSF).

Previous efforts to convert them into ordinary shares have been a stumbling block in NBK’s past fundraising plans.

Mr Oigara said resolution of the preference shares is critical if the proposed transaction is to proceed.

If successful, the deal will see the government take an additional three percent stake in KCB, raising its shareholding in the lender to 20.5 percent in what will cement its position as the single largest shareholder.

NBK’s board of directors confirmed that it had received KCB’s buyout bid Thursday.

“The board of the company will consider the offer in detail and make consultations and then seek the necessary approvals from the shareholders and the regulators,” the bank said in a statement.

“As earlier communicated, National Bank’s principal shareholders have committed to improving the bank’s capital position, which is expected to unlock the potential for the bank in boosting market position, improving customer value proposition as well as enhancing the bank’s overall growth agenda.”

The deal is valued at Sh6.6 billion based on KCB’s closing price of Sh45 Thursday and represents a 5.1 percent discount to NBK’s book value of Sh6.9 billion as of December.

KCB’s deal, however, represents a massive premium of more than four times NBK’s market value of Sh1.5 billion Thursday.

NBK’s share price gained 4.6 percent to close at Sh4.7, having touched highs of Sh5.5 on the announcement of KCB’s offer, signalling that investors see the buyout as unlocking value for them.

KCB’s share price, on the other hand, was largely unaffected at Sh45.

Taking shares in KCB will enable NBK’s shareholders, including the government and the NSSF, to ride on KCB’s economies of scale that have delivered billions of shillings in earnings and dividends.

Mr Oigara said KCB has adequate cash to absorb NBK without raising additional capital.

“We have surplus capital and we don’t see the need to take new capital for the next few years. We will maintain our dividend payout ratio of 50 percent,” Mr Oigara said.

KCB’s move to take over NBK marks the latest deal-making in the banking sector where rivals are racing to build scale that is seen as critical in slashing costs and boosting margins.

The wave of mergers and acquisitions has been motivated by the control of lending rates, a move that significantly reduced margins in the mainstay lending business.

Besides NBK, KCB is set to acquire certain parts of the collapsed Imperial Bank and the twin transactions will fuel the country’s largest bank’s race to a Sh1 trillion asset base.

KCB, which had assets of Sh714.3 billion in December, will see the figure breach the Sh800 billion mark if the tie-up with NBK is concluded.

Other pending deals in the banking sector include the merger of NIC Group and CBA Group, which received the approval of the respective banks’ shareholders.