Oct 2006 Financial News

Mixed response to BNS' DB&G takeover bid price

Oct 25, 2006

There is tremendous variation in the market's response to news of BNS' offer price to acquire as much as 80 per cent of the shareholding of Dehring Bunting and Golding (DB&G).

Late last Friday, BNS disclosed its offer price of $21.08 per share to acquire controlling interest in the investment firm.
Given the significance of this proposed acquisition involving the country's largest commercial bank by asset size and the largest equity trading company, the Business Observer contacted a number of leading financial analysts who gave divergent responses on the attractiveness/appropriateness of a price of $21.08 per share and whether the offer would prove a hit on the market.

Significantly, there seems to be some consensus on the method BNS used to determine the share price, namely that it was based on DB&G's historical earnings and reflects a price/earnings (p/e) ratio that is seven times earnings.
Analysts view this pricing strategy as reasonable in the context of the current sluggish stock market and the outlook of falling interest rates that impact negatively on fixed income investments.

Doyl Smith, investment analyst at Jamaica Money Market Brokers (JMMB) said this kind of price earnings was not huge, given the dynamics of the present market. "If the market dynamics were different, then I would expect a higher price earnings ratio," said Smith. "However, as conditions are, the current PE ratio is reasonable."

Mario Watts, senior trader at RBTT Securities, agreed. The price, he said, was reasonable, given that DB&G has the lowest PE ratio in the market of 6-8 times earnings when other companies in the financial sector have traditionally traded at 8 to 10 times earnings.

Supporting BNS' rationale for its offer price, Watts said, "Had this been a bullish market, we would have expected the price to be nearer to $25. In that case, we would have expected BNS to pay a premium."

But while there was an understanding of the philosophy of BNS's pricing strategy, there was noticeable disagreement concerning the apropriateness/efficacy of the $21.08 price offer, given the peculiarities of the company at the heart of the acquisition bid. The main factor that prompted a rejection of the share offer price had to do with the company's creditable performance in the past. Analysts are quick to point out that in February 2004, the stock was trading higher than $26. Then in February 2005 the price fell to $26. But when other financial companies' stocks prices, such as JMMB and Capital and Credit Merchant Bank, showed tremendous volatility, DB&G's stock price remained essentially stable.

Rejecting BNS' sale price offer as unrealistic, economist Cedric Wilson argued that the offer was unreasonable and would not spin with the current investors in the market who were investors who had medium- to long-term perspectives.

Wilson said that speculators had left the market and the present investors would remember the stock's past record-breaking performance and therefore would not warm to the offer on the table.

"Unless BNS came with a price that was closer to $24, I don't believe they will secure anywhere near 80 per cent shareholdings from the market," said Wilson.

Popular stock market pundit, financial analyst John Jackson, in expressing opposition to the price, said that it was not a 100 per cent acquisition and therefore investors could refuse the offer if they felt the price was too low.

He noted that the price was calculated at nearly seven times the earnings from the last fiscal year earnings. The popular, sometimes controversial Jackson said that for this price to still be applicable when this year's results are finally out, then it means that the company's earnings would have had to have fallen by nearly a third for the current p/e ratio to have any relevance.

"DB&G is the best performing company and the best performing stock listed on the Exchange," said Jackson. "The purchasers of this company should be paying a premium, not enjoying a discounted price."

But one analyst who preferred to remain anonymous, threw the proverbial cat among the pigeons as he said that for him the stock price was a non-issue. As he saw it, the past performance of the investment firm was unsustainable.
"BNS did its due diligence and felt that the company's impressive performance was not sustainable, especially with the outlook for reduced rates," he argued.

The offer, he said, will definitely be gobbled up by the existing DB&G shareholders and the general public.
But what is likely to happen if the 80 per cent offer is not taken up by the public?

Jamaica Stock Exchange data show that the top 12 DB&G shareholders account for $172 million worth of shares out of total outstanding shares of $303 million. If the DB&G shareholders are to comply with the bid proposals that require a minimum of 75 per cent of the outstanding shares, that is, $227 (75 per cent of 304 million ), this means that DBG would have to raise at least another $54m ($227 million - 174 million) from the investing public (minority shareholders) to seal the deal.

If DB&G is incapable of raising this required level of shareholding support, the expectation is that BNS will just go for majority control (51 per cent control or more).

In the meantime, the Jamaica Association of Minority Shareholders is yet to issue a statement on the offer and whether it has any concerns regarding the protection of its members' interests.

Meanwhile, all attention in the financial sector will be focussed on when DB&G releases its latest quarterly results. In the past, DB&G has had a tradition of producing its results early, and analysts are expecting third quarter results by early November.

It is only then that analysts will be in a position to really determine whether BNS's stock price on the table will stand or whether BNS officials will have to go back to the drawing board.

Errol Gregory , Business editor
The Jamaica Observer
Wednesday, October 25, 2006
http://www.jamaicaobserver.com/magazines/Business/html/20061024T230000-0500_114453_OBS_MIXED_RESPONSE_TO_BNS__DB_G_TAKEOVER_BID_PRICE.asp