DIANA CORBO HAITHAM HAMID

OMOWALEOLA OREPITAN RAGHAV MIMANI

Bank PHB & Spring BankNigeria, December 2008

Recapitalization In Nigeria

Recapitalization was an attempt by the Central Bank of Nigeria (CBN), to solve the problem of bank distress and failure, and to reposition the industry for national and global economic challenges

In the year of 2005, Nigerian banks were required to increase their minimum capital from US$15m to US$195m, an increase of 1,300 per cent

The recapitalization exercise resulted in the shrinkage of the number of banks from 89 to 25 merger/acquisition involving 76 banks which altogether

accounted for 93.5% of the deposit share of the market

Background Spring Bank

Merger of 6 banks – 4 major, 2 minor Guardian Express($76.83m) , Citizens

International($59.90m),  ACB International ($0.32m), Fountain Trust($0.63m), Omega Bank ($74.33m)and Trans-International($22.07m)

As at December 22, 2005, CBN approved a total of $234.08m as representing the total shareholders funds of the newly formed Spring Bank 

The parties that formed the bank were from two strong ethnic groups from Nigeria, the Igbo and the Yoruba

Crisis at Spring Bank

CBN was negligent in verifying Spring Bank’s claim of $234.08m The short time CBN mandated banks to raise their minimum capital base was

obviously not enough for Spring Bank to recapitalize or find suitable merger partners

The post merger verification result showed the level of shareholders funds was of negative value of $372.84m instead of positive figure of $234.08m

Not all the six “legacy banks” actually had the level of shareholders funds that they claimed they had at the time of the merger Arguments ensued amongst the six legacy banks about the quality of their assets

for consideration in deciding board position allocations ACB was the oldest bank in the group and felt that they were more important Full blown board room crisis because the contending parties became split along

ethnic lines Spring Bank directors owed the bank huge  debts that they  incurred

through insider loans they gave to themselves  in their legacy banks but which they did not disclose at the point of the merger

Bank PHB Enters

• Bank PHB is a second tier bank with great ambitions of becoming a first tier financial institution in Nigeria.• Bank PHB lacked the kind of presence it wanted in the western

and eastern parts of the country which Spring Bank had

• Bank PHB offered Spring Bank shareholders a premium of $0.05 each for a stock that had been on technical suspension at $0.04 each in compliance with Security Exchange Commission (SEC) mandatory bid rule 131• The Nigerian Stock Exchange (NSE) lifted the imposition on

Spring Bank’s stocks from full suspension to technical suspension

• Bank PHB acquired over 51% of the 11.321 billion ordinary shares outstanding in the name of Spring Bank required for the deal to sail through

The Acquisition – The Good(Customers)

Spring Bank franchise will be better able to focus on serving its customers

Bank PHB is one of Nigerias fastest growing banks Average growth rate that 3x the Nigerian banking industry

average Spring Bank will be able to benefit from this structure and

assist in the development of Nigeria Banking infrastructureThe transaction is expected to take the Bank

PHB’s to the 2nd largest bank network in Nigeria. Branch network in the country to over 400,

making it the second largest bank by branch network in the country

The Acquisition – The Good(Shareholders)

The offer from Bank PHB may be the best opportunity Shareholders can sell and make some profits The bid price is at a 25 percent premium on the current market

price of N5.59 of Spring Bank Plc on the Nigerian Stock Exchange (NSE)

“The offer price is very good, considering that Spring Bank has not been able to pay dividends to shareholders in the last three years”

According to Renaissance Capital: Good deal for Bank PHB and Spring Banks shareholders Also good for customers, regulators, and employees

emergent institutions expanded distribution network additional comfort of banking with a much larger bank and

extended product offerings

The Acquisition – The Bad

The acquisition is the first hostile acquisition involving two listed firms on the Nigerian Stock Exchange (NSE)

The shareholders averred that the “mandatory bid” Bank PHB sought was illegal. Two-thirds of the 33 per cent it claimed were “rejected” and

“warehoused” shares The rejected shares (bubble capital) were alleged to have been

fraudulently acquired by some directors of Guardian Express Bank and Citizens Bank plc, two of the merging partners in Spring Bank

Most banking analysts agree will change the competition dynamics in the Nigerian banking industry in favor of Bank PHB

How We Evaluated the Transaction

• Market Capitalization• Market Value of Equity• Corporate Value Model

(CVM)

Stock Market

Reactions

• EBITDA Margin• Working Capital• Operating ROA• Operating Capital Turnover

Accounting

Measures

Stock Market Reaction

Market Capitalization

Valuation

Indicators

Market CapitalizationBefore Acquisition After Acquisition Change in M.C

Market Cap - Common Stk $ 166,801,200,000 $ 281,338,800,000 $ 114,537,600,000 Market Cap - Preferred Stk $0.00 $0.00 $0.00 Total Market Capitalization $166,801,200,000 $281,338,800,000 $114,537,600,000

69%

Market Value of Equity Stock price information were obtained for 3 months before

announcement and 6 months after announcement Accumulated Net Return was calculated over the 9 months to

determine how the market reacted to the acquisition announcement made on December 18th, 2008

Market Value of EquityPrice Before Accumulated Return Price After NOSO

$14.33 $9.84 $24 11,640,000,000

Stock Market Reaction- Continued...

Corporate Value Model The market value of the firm was calculated using the Corporate

Value Model, which incorporates Free Cash Flow Calculations and CAPMFree Cash Flow Calculations:

NOPAT = EBIT * (1-T)OCF = NOPAT + Non Cash ItemsFCF = OCF - Capital Expenditures - Change in W.C

Equity cost (CAPM):ER = R free + B (ER market-R free)

Equity Value (CEV) = CVM- Outstanding Debt

The FCF was discounted as a perpetuity using the CAPM as the Discount Rate.

Estimated Price Per ShareCEV 610,340,310,775 Shares 11,600,000,000

$52.62 Estimated Price Per ShareThe estimated price per share using the CVM model should be around $52.62

Accounting Measures...

Key Financial Indicators for PHB Bank

Description Before After

Cash Flow /

Liquidity

Indicators

NOPATEBIT 22,004,253 56,342,440

EBIT Margin 62% 65%

NOPAT 16,723,232 42,820,254

EBITDA 23,400,452 58,619,773

EBITDA Margin 66% 68%

Working CapitalWorking Capital 35,566,500 230,387,923

Change % 548%

Operating

Indicators

NOPAT / Operating Indicators

Operating ROA 41% 16%

Operating WC Turnover 100.06% 38%

Health After Transaction

The Bank showed a very healthy financial and operational measures despite the tough economic environment

The bank has moved from the 17th bank in Nigeria to rank among the top 7 in assets, top 5 in deposits and top 3 in capital

CAGR showed healthy growth in operating profit. Bank PHB offered more than 977 % return to investors,

the highest by any Nigerian bankInstituted new IS system which has improved flexibility,

reliability and performance Bank PHB emerged as one of Gambia’s most acceptable

brands with the third largest market in that country – through acquisition

Future Plans

Bank PHB has embarked on an offshore expansion with Africa as its first platform

Plans are also at an advanced stage for the opening of three new subsidiaries in Sierra Leone, Liberia and Ghana as well as the US

First and strongest bank in Nigeria to offer Islamic Banking and therefore has potential growth in this market as the first to market

Sources

http://www.businessdayonline.com/index.php?option=com_content&view=article&id=1995:bank-phb-completes-acquisition-of-spring-bank-&catid=1:latest-news&Itemid=18

http://www.saharareporters.com/reports/exclusive/3066-spring-bank-the-questionable-takeover-the-news.html

http://www.bankphb.com/general/news.php?n=35&mode=story&y=2009 http://www.bankphb.com/general/aboutus.php?p=41&mode=content Entrepreneur newsletter (September 2007) www.enterpreneur.com/tradejournal/article/16596676

Business Hallmark News (News twist in Spring Bank’s Acquisition by Tony Chukwunyem & Okey Onyenweakwu. 29 June, 2009 www.bizhallmark.com/index.php/penmalink

The News - ‘Spring Bank Acquisition Illegal’—Ministerial Report http://www.bankphb.com/general/investor_relations.php http://www.google.com/finance?q=s%26p+500+banks http://gulfnews.com/business/banking/nigeria-on-track-to-be-africa-s-islamic-finance-hub-

1.640710 http://www1.albawaba.com/en/news/nigerian-bank-chooses-red-hat-and-jboss-soa-

solutions-mission-critical-banking-applications-ban http://www.news.dailytrust.com/index.php?

option=com_content&view=article&catid=26:business&id=3956:bank-phb-writes-off-n16bn-margin-loans&Itemid=111