Access Bank and Diamond Bank announced on 17 December their intention to merge, for a total consideration of N72.5 billion ($200 million) – confirming a rumour that had been circulating for months but which Diamond had rejected just weeks before.
On November 12, as word of a possible merger was spreading, Diamond Bank reacted in a statement: “We wish to state categorically that the bank is not in discussions with any financial institution at the moment on any form of merger or acquisition.”
How the two banks could have begun discussions – and reached an agreement – in less than a month is hard to fathom. Asked about this, Chiamaka Ezenwa, head of investment banking for West Africa at Exotix, which advised Diamond on the deal, said she could not share the exact timeframe for negotiations, but that “it was a pretty quick transaction”.
The merger, if approved by both banks’ shareholders and by the Nigerian regulator, would create the biggest Nigerian bank by assets, with N6.1 trillion ($16.7 billion) – ahead of the current leader, Zenith, with its N5.6 trillion ($15.4 billion). Diamond said it expected the transaction to be completed in the first half of 2019.
As per the terms of the agreement, Access Bank would acquire the entire issued share capital of Diamond Bank in exchange for a combination of cash and shares in Access. Diamond shareholders would receive a consideration of N3.13 per share, made up of N1 per share in cash and the allotment of two new Access shares for every seven Diamond shares held.
The offer represents a premium of 260% to Diamond’s share price of N0.87 at close of the Nigerian Stock Exchange, where it is listed, on 13 December.
While Diamond’s share price peaked at N3.57 at the start of 2018 – when the Nigerian stock market rallied – it has spent most of the past three years closer to N1. This represented a dramatic fall from the previous period: in early 2014, shares were valued at times at over N7 each.
The collapse in value has largely been blamed on the fall in the price of oil, which halved within a year from mid-2014 and has only slowly and partially picked up since. The bank’s overexposure to small and medium-sized enterprises in the oil and energy sectors made it particularly vulnerable to such a drop.
There is clear strategic rationale for the proposed merger and strong complementarities between the two institutions- Uzoma Dozie, Diamond Bank
Those sectors comprised 73% of the bank’s non-performing loans by December 2017. Diamond’s latest results, for the third quarter of 2018, indicated that it had provisioned for just over half of its N99 billion ($272 million) of NPLs.
“The market has been penalising them for that [exposure],” Ezenwa said. “But the market also recognises that, outside of that legacy portfolio, it’s a very strong brand that has built a great platform, as one of the pioneers of using technology to drive financial inclusion and retail banking.”
While many view Diamond as a troubled bank, Ezenwa said that the premium Access is willing to pay proves the bank still has appeal. Foremost in the list of Diamond’s attractions, she said, was its retail banking proposition, which she said counted 18.8m customers, supported by 273 branches, over 1,200 ATMs and a growing mobile application.
In a release to the stock exchange, Herbert Wigwe, chief executive of Access Bank, stated that: “A merger with Diamond, with its leadership in digital and mobile-led retail banking, could accelerate our strategy as a significant corporate and retail bank in Nigeria and a pan-African financial services champion.”
In the same statement, Diamond’s chief executive, Uzoma Dozie, was quoted as saying: “There is clear strategic rationale for the proposed merger and strong complementarities between the two institutions. While Diamond Bank has pioneered Nigeria’s largest technology-led retail banking platform, Access Bank is one of Nigeria’s leading full-service commercial banks.”
Dozie added: “Consolidation in the Nigerian banking industry is an inevitable, natural progression in a sector where the gap between Tier 1 and Tier 2 banks has been widening and scale has become critical; where technology will disrupt the traditional business model while enabling broader financial inclusion.”
Both Access’s and Diamond’s share prices rose by close to 10% on the day of the merger announcement.
Ezenwa said this was the largest banking M&A deal Exotix had ever worked on in Africa, representing a landmark transaction for the boutique investment bank. Citigroup and Chapel Hill Denham acted as financial advisers to Access.
If the proposed merger goes ahead, it would not be the first such deal for Access Bank, which since 2005 has already joined forces with Nigerian banks Marina Bank, Capital Bank and Intercontinental Bank, and abroad acquired Banque Privée du Congo, Omnifinance Bank in Côte d’Ivoire and Bancor in Rwanda.
Still, Access will have its work cut out for it with this new acquisition, as it strives to sanitise Diamond’s loan book and redress its profits. Before income tax, these had fallen from N4.8 billion in the third quarter of 2017 to N3.1 billion over the same period in 2018.