In September of 2012, General Electric Company (NYSE:GE) announced that it had sold a 7.6 percent stake in Thailand’s Bank of Ayudhya (NASDAQOTH:BKAHF) for about $466 million. The transaction was followed by a formal solicitation of bids for its remaining 25.3 percent stake. This action has attracted the attention of a number of large regional banks and may presage further consolidation in the space. Since the final sale will produce a significant windfall for General Electric Company (NYSE:GE)‘s struggling financial arm, investors who wish to profit from this deal may find GE attractive at these levels. More aggressive players may earn even more impressive returns by taking stakes in other Southeast Asian banks.
Fairfield, Connecticut-based General Electric is a major international conglomerate that operates in a variety of important economic sectors. It manufactures and sells household appliances, light bulbs, heavy machinery, jet engines, oil drilling equipment, medical devices and various other specialized products. General Electric Company (NYSE:GE) employs over 300,000 people around the world and earned $14.7 billion on $146.8 billion in gross 2012 revenues.
Bank of Ayudhya is a full-service commercial and retail bank that operates principally in Thailand. The company offers various private lending services as well as commercial loans, structured financing and other financial products. In addition, it offers deposit accounts and investment management for its retail clients. Bank of Ayudhya earned $476 million on gross 2012 revenues of $1.6 billion.
How the Initial Sale Was Structured
Bank of Ayudhya does not trade regularly on the American markets. Accordingly, GE sold its stake on the Thai market for about 31.46 baht per share in cash and raised $466 million in the process. The final price at which the remaining stake will be sold is not yet known.
It should be noted that Thailand’s corporate governance laws differ from North American protocols in several key respects. In particular, the country’s financial regulators require formal tender offers from major-stake acquirers only if an acquirer intends to purchase more than 25 percent of a given company. Since General Electric Company (NYSE:GE)’s initial sale involved just 7.6 percent of the company, the identity of the stake’s buyer has never been officially disclosed. While the buyer may well be one of the banks that has since put forward a bid for the remainder of GE’s stake, this is impossible to say with certainty.
In addition, Thai law bans foreign entities from owning controlling stakes in a Thailand-based bank. Accordingly, companies that already own stakes in Bank of Ayudhya may have to enter into strategic partnerships with Thai entities before putting forth bids for the institution. Furthermore, Thai law bans domestic banks from purchasing independent banks for the purposes of operating them as wholly owned subsidiaries. Known as the “single presence” policy, this requires Thai banks that wish to consolidate to arrange formal merger proceedings.
Bids for Ayudhya
Collectively, these rules may well complicate the final agreement between General Electric Company (NYSE:GE) and Bank of Ayudhya’s winning bidder. For instance, favored native bidder Siam Commercial Bank (SCB – BANGKOK) would not be able to purchase Ayudhya outright. Instead, it would need to merge with the company in full.
Several non-Thai banks have put forth their own bids. In addition to Malay lending giant Maybank (MAY – SINGAPORE), interested bidders include Japanese lender Mitsubishi UFJ Financial Group Inc (ADR) (NYSE:MTU) and Malay bank CIMB Group Holdings (CIMB – KUALA LUMPUR). While none of these bids have yet been formalized, it appears likely that one will eventually win out over the others. GE is expected to solicit a second round of bids in the coming months.
Mitsubishi UFJ Financial Group Inc (ADR) (NYSE:MTU) could afford a large takeover with a massive cash stockpile that is continually growing. In the last year Mitsubishi had a 102% gain in quarterly earnings year over year. Their net income is now up to $1.46 billion. The market has noticed these gains with a 17.12% return for their stock in the last year. It may be able to improve on its already great performance with an acquisition like this.
What May Happen Next
This deal has two important ramifications. For starters, it is indicative of General Electric Company (NYSE:GE)’s desire to continue to unwind the convoluted holdings of its GE Capital financial arm. This unit sustained heavy losses during the recent financial crisis and is widely seen as GE’s weakest major division. Regardless of the exact terms of the final bid, this deal will be wildly profitable for GE Capital. After purchasing 33 percent of Bank of Ayudhya for about $626 million in 2007, GE has already earned $466 million on the partial sale and will probably recoup another $5.5 billion or so from the sale of the remaining 25.3 percent stake.
This sale also hints at the possibility of a period of consolidation in the rapidly maturing Southeast Asian banking sector. Earlier in the year, Singaporean banking giant DBS Group Holdings (DBSM – SINGAPORE) agreed to purchase Indonesian lender Bank Danamon (BDMN – JAKARTA) for around $7 billion. GE’s successful Ayudhya sale may indicate that investors expect more deals in the sector.
In sum, this sale represents an exciting opportunity for investors who have an interest in developing markets. With few legal hurdles to clear, it could go through as early as mid-summer 2013. Conservative investors who wish to reap the cash-flow benefits of this sale could play the transaction by taking a long position in General Electric Company (NYSE:GE). More aggressive investors might wish to scan the Asian banking landscape to find other consolidation or spin-off targets. Of course, it is essential that investors who wish to play this deal perform adequate due diligence.
The article Selling Its Stake In A Foreign Bank originally appeared on Fool.com and is written by Mike Thiessen.
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