The sale of a stake in Landsbanki to Samson will take place in two stages. Following the completion of a purchase agreement – due on around November 20 – 33.3% of the shares in the bank now owned by the state will be delivered to Samson. The remaining 12.5% stake will change hands a year later, bringing the state’s stake in Landsbanki down from 48.3% to 2.5% by November 2003.
The total consideration will be IKr12.3 billion ($138 million). This implies an average net present price per share of Ikr3.91, 6% above the 90-day average price. The acquisition price will be paid in dollars which will be primarily used to pay down foreign debts of the state treasury.
There were sighs of relief around Reykjavik when the deal was announced. The government had managed to paint itself into a corner by making ambitious promises to complete bank privatization by the end of this year. That proved a much harder task than it had expected.
Early attempts to find a foreign bank to take a strategic stake in Landsbanki or Búnadarbanki foundered. Nordic banks, preoccupied with larger and more complex domestic and regional mergers, took little interest in the small Icelandic market. Attempts to privatize the state telecom company earlier this year also had to be abandoned, depriving the government of IKr 21.5 billion it had budgeted for in 2002.
So the Icelandic government was delighted to receive a bid from Samson in the spring. But the Landsbanki deal nearly didn’t happen.
Björgólfur Thor Bjorgolfsson, talking to Euromoney on October 18, the day before the official announcement of the agreement was released by the executive committee on privatization, was clearly close to calling the whole thing off.
“With any other deal, I would have walked away a long time ago,” he said. “It’s been the trickiest I’ve ever worked on.”
He argued that the whole process of advertising the sale publicly robbed Samson of its early-mover advantage. “We made our offer first when this bank had already been sitting with a for-sale sign round its neck for 18 months. We stated all of our objectives and price parameters then. Then suddenly it all had to be opened up. Now our interest is built into the share price, which has moved up against us. What’s more we’re effectively foreign investors and that’s moved the exchange rate against us. We’re bidding against ourselves.”
So why had he stuck at it? “There’s some kind of patriotism and also a feeling of responsibility, that a lot of people are waiting on this now.” But it had all dragged on rather too long. In what he describes as the down time from the Landsbanki deal his group has created the largest company in Iceland through the merger of Pharmaco with Delta.
So he had no qualms about holding the government’s feet to the fire. Considerations of return are paramount to a financial investor. He said: “If someone came along and said ‘here’s a different investment with a likely 100% IRR and a safe exit in three years’, I’d have to take it. We’ve put our best efforts into this but we have an economic reality.”
By the close of business on Friday October 18, the deal was nearly dead. By around 03:00 on Saturday October 19 it was alive again. What revived it?
Speaking from South Africa, where he later took a short holiday, Björgólfur Thor Bjorgolfsson claims that key technical issues were resolved. Splitting the share sale into two tranches and fine-tuning the discount rate applicable to the price for the second tranche produced a blended net present share price of IKr3.91 – acceptable to Björgólfur Thor Bjorgolfsson, even if it represents a hefty premium to the IKr3.50 Landsbanki shares traded at before Samson’s interest became public.
Making the payment in dollars also removes the danger for Samson of moving the exchange rate against itself. “These were the big issues,” says Björgólfur Thor.
He envisages spending up to 40% of his time in the next 18 months working on Landsbanki. After four years, he says he will review whether to keep the asset or whether, having released its potential, to exit. “We’re expecting a consolidating landscape in banking for some time and we expect Landsbanki to be a key player. In fact we’re the ideal partner for any consolidation play.”
He makes a final point. Due diligence works both ways. He is surprised that the government is surprised that he wants a good look at the loan book. Even though bank secrecy laws dictate that this be done through an independent third-party auditor, he’s taking nothing on trust. “This was a state-owned bank. What about some of those old loans. If there’s something in there [bad debts], we’re not taking the fall.”
KPMG is due to report to him soon.
