Access Bank Acquires Diamond Bank: Is Bigger Really Better?

Dear Africa Interested Professionals:

I will endeavor to be concise because I have a lot to say and not enough time to do so.

I wrote in my last article on this blog three weeks ago, that the CEO of Diamond Bank should resign for the sake of the bank's continued existence as a going concern.  While my wish has now become reality, the manner has set many bells ringing.  You remember that boyfriend that said "if I cannot have you, no one will?"  The girlfriend ends the relationship with the boyfriend and the boyfriend eliminates her as a form of last revenge.  Diamond Bank being acquired (merger frankly has no place in this discussion) by Access Bank has pretty much put Uzoma Dozie in the history books as the last CEO of Diamond Bank.  If he had to ignominiously resign as the CEO of Diamond Bank, it would not be for someone else to take over, no matter how capable apparently.  If Uzoma goes down, then Diamond Bank must go down with him.  The seat he waited for sixteen years to get a feel of must not be occupied by anybody else if he has to resign; and so we have it. 

By the second half of 2019, Diamond Bank will no longer exist as a bank and separate legal corporate entity and Uzoma Dozie will no longer be the CEO.  This is the second Nigerian Bank in the past seven years that has been run aground by the owner's family in the position of CEO: Oceanic Bank owned by the Ibru family is gone; Diamond Bank owned by the Dozie family is going.  Is FCMB next up for collapse?  N10B revaluation boost on the income statement needed to generate profit in Q3 2018, does bring this thought closer to home.   

Diamond Bank has now been sold to Access Bank for the equivalent of N3.13 per share; a price that Diamond Bank surpassed in January 2018.  Diamond Bank is desperate and Access Bank is clearly greedy (not the first time) and the combination brought about this acquisition that has been on the rumor burner for some weeks now despite copious denials by the management of both banks.  

Was Diamond Bank acquired for cheap? Yes!  When a bank is acquired for less than a third of its reported shareholders' equity as at Q3 2018, then, the buyer took the seller to the cleaners literally.  Are Diamond Bank's shareholders in a better place with their investment than continuing as a going concern under the leadership of Uzoma Dozie?  Yes!         

Access Bank has a knack for pursuing banks in perceived or real distress as management is known to seek huge discounts to value and feels banks in distress give it the best leverage to buy value cheaply.  Access Bank tried to buy Union Bank about eleven years ago unsuccessfully, bought Intercontinental Bank for peanuts in 2011 from the Central Bank despite Aigboje and Herbert Wigwe owing Intercontinental Bank N16B through a company called United Alliance they owned and now  in 2018 have succeeded in buying Diamond Bank at a time of distress.  

Diamond Bank shareholders need to thank Carlyle Group for the deal they were able to negotiate with Access Bank.  If there was no prominent significant shareholder on the board of Diamond Bank, Access would have taken over Diamond Bank for maybe a third of current acquisition price of N3.13 per share. 

DIAMOND BANK POST ACQUISITION ANNOUNCEMENT CONCERNS

1.  Unity Bank (Northern ownership of nine banks coming together) has managed to miraculously remain intact over the years despite its precarious state. Wema Bank (Western ownership) has also managed to remain intact despite plenty of upheaval over the years including CBN loans that had to be written off.  Both banks remain intact with their name and identity.  Diamond Bank (Eastern ownership) has now been allowed to be gobbled up by another Nigerian bank with a different identity while distressed prominent banks from the other two major geo-political zones of the country found a way to survive independently as banking symbols of these regions with the help of the CBN.  The people of the Eastern region of Nigeria are very business driven and may turn against Access Bank that gobbled up a bank they are proud of.  Igbos have been complaining of marginalization, this will not help to sheath their swords.   The larger business implication of this will likely have a negative impact on Access Bank.  Fidelity Bank may gain new business here if they think quickly and act fast.  

2.  Access Bank will take all the intangibles and cherry pick the tangibles from the assets of Diamond Bank.  Diamond Bank's retail banking strength, technology (app and mobile banking) will be gobbled up by Access.  Many employees will be laid off or fired, branches will be closed (some for proximity reasons and others for business reasons).  Once Access Bank is done with Diamond Bank, there will be little of Diamond left to show and speak of in History classes.  Once the deal is fully completed, asset stripping is likely to be a better reflection of reality than acquisition or merger as announced.    

3.  Based on written material disseminated today that I have come across, there is no mention yet of exactly when Diamond Bank shareholders will receive Access Bank shares in their brokerage account in the ratio of 2 Access Bank shares for every 7 Diamond Bank shares previously held and the N1.00 per share held in cash.  This is very important information that no categorical statement has been provided that answers WHEN. 

4.  No mention of the qualification date for Diamond Bank shareholders that will merit receiving the N1.00 per share and for 2 for 7 share swap.  This should have been announced immediately to bring more investment legitimacy to the deal.  

5. If the share price of Access Bank drops below N7.50 approximately, Diamond Bank shareholders will be short-changed of the purported N3.13 acquisition price.  This increases the importance to know WHEN the share swap will take place.  

ACCESS BANK POST ACQUISITION CONCERNS

1.  Access Bank has a very different business and company culture compared to Diamond Bank.  Access Bank will not be able to retain a significant number of Diamond Bank customers and their deposits in my opinion.  The business attraction of Diamond Bank to Access Bank is built on years of a culture that endeared them to customers (especially retail).  Access Bank's culture is an antithesis of this.  While this was not intended, this is the reality of Access Bank among the banking populace in Nigeria and will prevent the endearment of Diamond Bank's customers to the larger Access Bank.  

2.  Access Bank is increasing its size because it CAN and not because it SHOULD.  First Bank, ETI, UBA and Skye Bank have gone down the same road in the not too distant past and have tales of woe to tell.  The quest for size did not yield the spectacle of performance expected and commensurate with the newly acquired size and anticipated synergies.  All these banks had to painfully choose consolidation over accumulation to remain in business after going through multiple years of unexpected and dismal financial performances.  Access Bank will be no different in my opinion.    

3. Burdened bank acquiring an overburdened bank.  Access Bank plans to pay back its $400m Eurobond in 2019 two years early as the bond will no longer qualify as capital for capital adequacy ratio purposes and it is not economical to continue to pay interest.  Diamond Bank has to pay back its $200m Eurobond (this is now Access Bank's burden) in May 2019.  Access Bank needs about N240B

before June 2019 to pay the cash due to Diamond Bank's shareholders and  pay the $600m (N216B) due to bondholders of both banks in H1 2019.  As a consequence, the bank is raising fresh debt of $250m and also embarking on an equity rights issue to generate $200m naira equivalent to enable the bank pay off these obligations.  

4. Proliferation of outstanding shares: When all is said and done, (rights issue and 2 for 7 share swap) I expect Access Bank's outstanding shares to exceed forty billion which I believe is the most outstanding shares among all listed banks in Nigeria and even Africa.  It is difficult to generate earnings per share worthy of mention with outstanding shares of this amount.  

5.  The current CBN governor's tenure ends in May 2019; regardless of who wins Nigeria's February 2019 election, I do not expect Godwin Emefiele to get a second term.  The new CBN Governor may review the acquisition deal and the previously need to know but unknown to the investing public, suddenly becomes known.  The timelines announced clearly reflect a rush to get the deal concluded before Godwin Emefiele's tenure ends and uncertainty over his successor mounts.  

6. While history does not have to repeat itself, it does come with plenty of lessons for others to reflect on.  No Bank that acquired a Nigerian bank in DISTRESS, has been successful post acquisition size yet.  

A). FCMB acquired Fin Bank; worse off than before acquisition

B). Skye Bank acquired Afribank; extinct and now under control of the Central Bank of Nigeria.  

C). ETI (Ecobank) acquired Oceanic Bank; still struggling, consolidation in progress, borrowing aggressively that has now been converted into equity and led to dilution of shareholders and two major shareholders that could not be anymore different (Nedbank and Qatar National Bank) on ETI's board.   

D). Bank PHB acquired Spring Bank; Bank PHB is now extinct, the Central Bank unwound the acquisition of Spring Bank by Bank PHB and now sold the bank to Heritage Bank which is more often forgotten than remembered as a bank in Nigeria...

E). Sterling Bank acquired Equitorial Trust Bank; neither here nor there.  Nothing worthy of mention.

F). Access Bank acquired Intercontinental Bank seven years ago; the combined bank is struggling but keeps doing things to remain busy, while aggressively papering over the cracks which keeps its aura of success persisting in the eyes of the media and analysts.   Access Bank's pre-tax income for FY 2017 was N80.1B .  Ten years earlier in February 2008, Intercontinental Bank had a sole pre-tax income of N45.6B.  As at December 31, 2010, Intercontinental Bank and Access Bank had a combined pre-tax income of N81.7B.  Seven years later, the combined pre-tax income has actually reduced.      

    

Once upon a time in 2000, there was AOL buying Time Warner for $165B to become AOL Time Warner and the largest merger in the world at the time.  In 2003, Time Warner sells its music division.  In 2009, the company spins off Time Warner Cable.  In the same 2009, Time Warner spins off AOL and in 2015 Verizon Communications buys AOL for $4.4B.  IN 2015, Charter Communications agrees to acquire Time Warner Cable.  In October 2016, AT&T agrees to buy Time Warner for about $85.4B.    

Getting bigger does not always imply getting better as we see above.  Access Bank is clearly getting bigger; the road to better is yet to be seen.  Access Bank shareholders brace yourselves for the long haul.  The greed of Aigboje Aig-Imoukhuede and Herbert Wigwe to make Access Bank the biggest and the best at all cost (at the very least on the surface) may very well be the bank's greatest undoing.  In life, it is not all that we want and can have that is actually good for us.  It takes wisdom and discipline to know when to hold 'em and when to fold 'em. 

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