Bloomberg News

DBS-Danamon Deal Seen Imperiled by Ownership Rules: Real M&A

May 25, 2012

A woman walks past a PT Bank Danamon Indonesia ATM in Jakarta. Photographer: Dimas Ardian/Bloomberg

A woman walks past a PT Bank Danamon Indonesia ATM in Jakarta. Photographer: Dimas Ardian/Bloomberg

Southeast Asia’s largest banking takeover is turning into the emerging-market deal that traders bet is the most likely to unravel, as Indonesia considers restricting foreign ownership of its lenders.

Shares of Jakarta-based PT Bank Danamon Indonesia (BDMN) closed yesterday 21 percent below a 7,000 rupiah per share offer from Singapore’s DBS Group Holdings Ltd. (DBS), the biggest discount since the 66 trillion rupiah ($7 billion) takeover was announced last month, according to data compiled by Bloomberg. The gap is the widest for a pending deal of more than $1 billion in any developing nation, indicating arbitragers are convinced the transaction is the least likely to be completed, the data show.

While Danamon had closed about 8 percent below DBS’s offer price at one point last month, potential regulations from Bank Indonesia to limit foreign ownership of financial firms may now cause the deal to fall apart, ABN Amro Private Banking said. Indonesia is also using the deal as leverage to gain better access to Singapore for the country’s lenders as they plan their own overseas expansion, according to Vriens & Partners Pte.

“The likelihood is that the tender offer won’t happen, so the decline in the share price is natural,” said Syaiful Adrian, a Jakarta-based analyst for PT Ciptadana Securities. “For the deal to happen, it must have Bank Indonesia’s approval. Bank Indonesia objects to the deal and wants to tighten regulation. Foreigners can expand so easily in our banking industry whereas it’s very difficult for us to open a branch overseas.”

Falling Margins

After dropping as much as 7.2 percent, Danamon ended down 6.3 percent at 5,200 rupiah today. The closing price is Danamon’s lowest since March 30, before the takeover was announced, according to data compiled by Bloomberg. DBS lost 0.4 percent to S$13.17.

“Bank Indonesia has yet to make any formal announcement and we would be unable to comment,” said Karen Ngui, a spokeswoman at DBS. “We are waiting for Bank Indonesia’s regulation,” said Zsa Zsa Yusharyahya, Danamon’s spokeswoman.

With the takeover of Danamon, DBS would gain a 3,000 branch network of 6 million customers, more than the entire population of Singapore. Southeast Asia’s largest bank, DBS generates 81 percent of its profit from its home city and Hong Kong, where low interest rates have squeezed income from lending, according to data compiled by Bloomberg.

DBS posted a net interest margin of 1.77 percent in 2011, marking a fifth year of declines for that measure of profitability from lending. While Danamon doesn’t report its net interest margin, according to data compiled by Bloomberg it was 8.95 percent in 2011.

Indonesia’s economy grew 6.46 percent last year, its fastest rate since the Asian financial crisis began in 1997.

Temasek Holdings

Saying the purchase would improve its growth profile, DBS announced on April 2 that it would acquire Danamon in two transactions, with the first involving swapping its shares for the 67 percent stake in Danamon that is owned by Singapore’s state backed investment fund Temasek Holdings Pte. The company will then pay 7,000 rupiah a share for another 32 percent, for a total value of more than $7 billion.

That would make it the largest takeover of a Southeast Asian bank, exceeding Singapore-based United Overseas Bank Ltd. (UOB)’s $5.5 billion acquisition of Overseas Union Bank Ltd. in 2001, according to data compiled by Bloomberg.

Temasek, which has owned a stake in Danamon since 2003, is also DBS’s largest shareholder, with an almost 30 percent stake in the Singapore bank that would rise to 40 percent if the Danamon purchase closes. Temasek declined to comment on how new bank ownership rules may affect the sale.

National Identity

On April 11, Bank Indonesia, the nation’s central bank, said it had sent a letter to its counterpart in Singapore seeking equal access for Indonesian lenders looking to expand in Singapore. The central bank didn’t specify what kind of access it was asking for.

The Monetary Authority of Singapore yesterday referred to a previous statement that its dealings with other regulators are confidential. Difi Johansyah, a spokesman at Bank Indonesia, declined to comment on the talks with Singapore or coming change in ownership rules.

Currently only one Indonesian lender, PT Bank Negara Indonesia (BBNI), has a full bank license in Singapore that allows it to take deposits, make loans, and offer financial advisory services and insurance broking, among other businesses, data from the Monetary Authority of Singapore show.

The deal also faces a political backlash. A week after Bank Indonesia raised its demands, Indonesia’s Deputy Finance Minister Mahendra Siregar said the country’s banks risked losing their national identity to foreign owners.

“We are concerned that Indonesian institutions only become the branches of foreign banks,” he said on April 19. DBS responded the following day that it planned to retain the Danamon brand after the takeover.

‘Very Frustrated’

DBS’s bid for Danamon came as Indonesian banks seek greater access to Singapore to profit from cross-border trade between the two countries and the opportunity to manage assets for wealthy individuals, according to Hans W. Vriens, managing partner at Vriens & Partners Pte, a Singapore-based public policy and political risk adviser.

Singapore is Asia’s largest wealth-management center, with $512 billion in offshore wealth-management assets in 2010, according to Boston-based Boston Consulting Group. Indonesia was Singapore’s third-largest trading partner in 2011 with total trade amounting to $61 billion, according to International Enterprise Singapore, a government agency.

Indonesian regulators “are very frustrated that Indonesian banks are restricted in their development in Singapore,” said Vriens. “They’ve been pushing for reciprocity for some time, but now they are using this deal as a lever to put pressure on Singapore and push more forcefully.”

Asian Financial Crisis

Indonesia currently allows foreigners to own 99 percent of a bank, a legacy of the Asian financial crisis when the nation’s economy shrank 13 percent in 1998. The country was forced to accept a $43 billion International Monetary Fund bailout as its currency slumped, companies defaulted on debt and more than 80 banks failed or were nationalized or recapitalized.

“During the Asian financial crisis, when the Indonesian banking sector went belly up, they were mostly sold off to foreign banks,” said Vriens. “Now their own banks are trying to expand overseas, but they are somewhat less welcome in other countries.”

Bank Indonesia said on April 27 that it wouldn’t review DBS’s bid until after it unveils new ownership rules for banks and also reaches an agreement on access to Singapore. That helped send Danamon’s shares to a two-day, 11 percent decline as investors speculated the new regulations would cap ownership stakes for foreign banks and scuttle the deal.

Majority Stake

Foreign banks and other investors from highly regulated industries will still be able to own a majority stake in Indonesia’s banks, central bank Governor Darmin Nasution said last month. Nasution didn’t specify how high the ownership limit may go.

Investors are projecting that foreign owners may be limited to a maximum stake of about 50 percent, said Daphne Roth, Singapore-based head of Asian equity research at ABN Amro. That would mean DBS cannot make a tender offer for Danamon shares Temasek doesn’t own, or even buy all of Temasek’s stake, Roth said.

At 5,550 rupiah, the shares ended 21 percent below DBS’s offer yesterday, the widest spread of any deal worth more than $1 billion in the world’s emerging markets, data compiled by Bloomberg show.

Ownership by foreign financial institutions may be capped at 40 percent, Bisnis Indonesia reported on May 23, without saying where it obtained the information. Discussion of the regulation is ongoing, Bank Indonesia’s Johansyah said, without elaborating.

Currency Risk

Even if the deal is eventually approved, the risk that it may take longer than originally projected has scared off some foreign investors, who also face the risk of currency volatility while they wait, said Sam Hilton, a Hong Kong-based analyst at Keefe, Bruyette & Woods Asia Ltd. DBS has said it expects the deal to close later this year. The rupiah has fallen 1.3 percent against the U.S. dollar since the deal was announced.

“People are expecting pragmatism at the regulator level, but the timing is so uncertain,” he said. “There is a meaningful risk that it could get delayed beyond the second half of this year.”

Another would-be acquirer of an Indonesian bank, Malaysia’s RHB Capital Bhd. (RHBC), has been awaiting Bank Indonesia’s approval on its 3.1 trillion rupiah takeover of PT Bank Mestika Dharma since October 2009. Last month RHB said it expects a decision by June.

‘Go Back Again’

Indonesia and Singapore have clashed over investments in the past. In 2007, Indonesian competition regulators said Temasek breached antitrust laws by using indirect stakes in PT Telekomunikasi Selular, known as Telkomsel, and PT Indosat, the country’s top two mobile-phone service providers, to fix prices. It ordered Temasek to sell either stake within two years and the fund paid a 150 billion rupiah fine.

For now, investors are betting DBS’s tender offer for Danamon won’t proceed either, said Aldo Perkasa, who helps manage about $2.3 billion at PT Mandiri Manajemen Investasi in Jakarta.

“If the regulation is implemented and the tender offer doesn’t go through, you go back again to holding the stock based on its fundamentals,” he said. “That’s why the shares have fallen.”

To contact the reporters on this story: Sanat Vallikappen in Singapore at vallikappen@bloomberg.net; Berni Moestafa in Jakarta at bmoestafa@bloomberg.net.

To contact the editors responsible for this story: Daniel Hauck at dhauck1@bloomberg.net; Chitra Somayaji at csomayaji@bloomberg.net; Darren Boey at dboey@bloomberg.net.


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