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Wed 16 May 2018 01:51 PM

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HSBC's Saudi unit to buy local RBS venture in $5bn stock deal

Preliminary agreement is reached between RBS-backed Alawwal Bank and Saudi British Bank

HSBC's Saudi unit to buy local RBS venture in $5bn stock deal

HSBC Holding’s Saudi Arabia unit offered to pay a 29 percent premium to acquire Royal Bank of Scotland Group Plc’s local venture in a $5 billion stock deal.

In the preliminary agreement between RBS-backed Alawwal Bank and Saudi British Bank, Alawwal shareholders will receive 0.485 SABB shares. The deal values Alawwal’s existing share capital at about 18.6 billion riyals ($5 billion).

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A merger would be Saudi Arabia’s first bank combination for almost 20 years and would make SABB the kingdom’s third-biggest lender with assets of about $73 billion.

International lenders are grappling with how to approach the Middle East’s biggest economy, which is embarking on an unprecedented diversification and privatisation plan, but still blocks foreign control of local banks.

“This is a bigger premium than I expected,” said Jaap Meijer, managing director and head of equity research at investment bank Arqaam Capital Ltd. in Dubai.

“It was always going to be the case that Alawwal would get a premium because they are the junior partner in the deal. We thought the price could be softer because you have a very willing seller in RBS.”

Alawwal shares surged 10 percent, the maximum daily limit, at the open in Riyadh trading on Wednesday, while SABB shares were trading 4.7 percent lower. Both lenders are based in Riyadh, with HSBC owning 40 percent of SABB.

Unsuccessful sale

RBS has for years been trying unsuccessfully to sell its stake in Alawwal, which it took on as part of its acquisition of ABN Amro Bank NV. The Edinburgh-based firm is cutting investment-banking operations around the world to focus on consumer and commercial lending in the wake of a U.K.-government bailout.

“A share swap could be the first stage toward a formal exit,” said Richard Segal, senior analyst at Manulife Asset Management in London.

“In the meantime, this transaction values its holding at 16.3 riyals, compared with the previous close of 12.66 riyals, which is a nice upward revision for the balance sheet - $1.5 billion overnight.”

Trading in SABB and Alawwal was suspended on Tuesday. Shares in SABB have climbed 19 percent this year, valuing the company at $12.8 billion. Alawwal has gained 18 percent, giving it a market value of $4.2 billion. Both banks said they don’t expect involuntarily job losses if a deal is completed.

SABB’s agreement with Alawwal follows the combination of other regional banks as they battle with low oil prices, slower economic growth and a decline in asset quality.

United Arab Emirates-based lenders - National Bank of Abu Dhabi PJSC and First Gulf Bank - merged last year, while Qatar is in talks to combine three banks to create the country’s largest shariah-compliant lender.

France’s Credit Agricole SA last year agreed to sell half of its 32 percent stake in Banque Saudi Fransi to Prince Alwaleed bin Talal in a $1.54 billion deal, making the billionaire the bank’s largest investor.

While some European lenders are exiting Saudi Arabia, others are investing to position themselves for what’s expected to be a fee bonanza. The kingdom is overhauling its economy and plans to list Saudi Arabian Oil Co. in what could be the largest-ever initial public offering.

Citigroup got an investment-banking license from Saudi authorities last year after a 13-year absence from the market. Goldman Sachs Group Inc. received approval to trade local equities, and has doubled its staff in Riyadh, while Deutsche Bank AG is expanding in the kingdom as the outlook for bond and stock sales improves.

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