Why OCBC-Wing Hang Bank's $5.8b deal could finally get the green light

OCBC to pay HKD115 per share.

According to Maybank Kim Eng, OCBC will pay HKD115 per WHB share after the latter has returned HKD20.59 cash and HKD1.62 final DPS to its shareholders as revealed by its sources. On an ex-cash basis, OCBC is effectively paying out HKD35.4b (SGD5.8b) or 2.4x FY13 P/BV.

Here's more:

The all-in purchase consideration of HKD137.21 (HKD115 + HKD20.59 cash + HKD1.62 final DPS) per WHB share implies a 1.94x FY13 P/BV. The cash payout is to entice the minority shareholders of WHB to accept the deal.

It also ensures the Fung family does not lose “face” given the likely media headline of 2.4x P/BV (ex-cash), higher than the recently transacted price of 2.1x P/BV for the smaller and less established Chong Hing Bank.

High probability of being sealed.

In our view, the probability of a deal being consummated is very high. It appears that WHB has no other suitor except OCBC. Otherwise, it would have been an open bidding process and the Fung family would not have engaged in exclusive talks with the Singapore bank.

Besides, OCBC’s management appears very keen on owning a banking franchise in the Greater China region. One can surmise that there is a motivated seller and a serious buyer in this case.

Correction may not have ended. At the current price, OCBC’s valuation appears cheap with the stock trading at 1.3x FY14E P/BV, close to one standard deviation below its rolling average since Jan 2005. There were only two occasions over the past nine years that its P/BV valuation dipped below these levels.

That said, we think the current share price weakness is likely to persist, with downside bias, amid uncertainty over the WHB deal pricing and funding structure.

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