Following a proposed merger and acquisition deal between Access Bank and Diamond Bank which promised shareholders of the latter N3.13, shares of the tier-two bank have so far this year defied analysts’ forecast of a rally to the amount.
Access Bank traded below N6 per share throughout last week down from N7.45 it stood before the planned merger, a sign for investors willing to buy into Diamond Bank to tread cautiously, analysts said.
Based on the agreement reached by the Boards of the two financial institutions, the offer comprises of a cash consideration of N1.00 per Diamond Bank share and the allotment of 2 new Access Bank shares for every 7 Diamond Bank shares held as at the implementation date later this year.
Feelers and formal confirmation of the proposed merger through notices filed at the Nigerian Stock Exchange (NSE) by both banks triggered Diamond Bank’s stock to record a ten-day gaining streak to end 2018 at N2.18, its longest straight gain since January 2018 when Nigerian equities jumped to their highest level in over a decade.
Meanwhile, owing to the merger deal, which represents a premium of 260 percent to the closing market price of N0.87 per share of Diamond Bank on NSE as of December 13, 2018, analysts had projected that the December rally in Diamond Bank would continue until its share price hit that the Access Bank was ready to pay the tier-two lender’s shareholders.
Instead, over 7 percent of Diamond Bank’s market value has been wiped off so far this year as the stock which opened the year at N2.18 closed at N2.02 on the floor of the NSE after the close of trade on Friday, thereby underperforming the NSE All-share Index.
“For investors, they still have to be very cautious if they are to take positions on the stock at the current level,” said Gbolahan Ologunro, a Research Analyst at CSL Stockbrokers.
The zigzag trend in Diamond Bank this year also attributable to the general bearish sentiment in the market, according to Ologunro, slashed previous gains made by investors, causing the return on the stock for investors who bought into the equity on December 14, 2018 to wane from 151 percent to 132 percent, while those that took positions in the early trading sessions of this year are already counting their losses.
But for new investors hoping to take advantage of another rally in Diamond Bank shares, “it is not a buy at this level” Ayo Akinwunmi, Head of Research, FSDH Merchant Bank said, urging investors to be cautious as the stock could soon be placed on suspension by the NSE.
Although Diamond Bank rose by 12 percent last week to close at N2.02 to upturn losses recorded in the preceding week, Access Bank continued to decline on weekly basis, shedding 3 percent last week despite 6.60 percent gain recorded to close at N5.65 on Friday.
Going by the current prices of the two equities and conditions of the pact on the potential merger of the two lenders, seven (7) units of Diamond Bank now worth N14.14, this is N2.84 higher in value when compared with N11.30 of two (2) units of Access Bank as at the close of business on Friday.
As at December 13 before Diamond Bank rally began, seven (7) units of Diamond Bank worth N6.09, this is lower than 2 units of Access Bank valued at N14.90. This implies that the value of Diamond Bank has been eroded at this level if the conversion were to be implemented using Friday’s closing prices.
Also, an additional N1 per Diamond Bank share, if done before the consolidation of banks, would increase the value of seven (7) units of Diamond Bank to N21.14, this will however shrink to N11.30 after conversion.
Likewise, the worth of seven (7) units of Diamond Bank would still remain above two of Access Bank if the additional N1 per Diamond Bank share is done after consolidation as the converted Access Bank shares would only increase from N11.30 to N13.30.
Little wonder some existing shareholders of Diamond Bank sold their shares to make profit with expectation of low returns after conversion to those of the tier one lender.
“What we have seen is profit taking following that rally that we have seen on the stock, the significant increase in the share price has provided opportunity for those who have held on to the stock to take profit on it,” Ologunro said.
According to Ologunro, the only driver that will give further uptick in Diamond Bank share price is if there is a reversal in terms of upward movement in Access Bank to N8 per share.
However, if Access Bank continued at the present price trend, shareholders of bank may not get the benefit from the transaction in the short term as the lender’s outstanding shares would surge, while earnings might be affected greatly owing to acquisition costs and high non-performing loans it would take over from Diamond Bank.
Furthermore, Access Bank may likely make fresh listing by a way of rights issue, this may likely cause earnings dilution which may make the price to go down, said Akinwunmi.
This is because the lender might not be able to grow its earnings substantially as its outstanding shares in the next three years, indicating that “the dividend the bank will be able to pay will go down the EPS will go down.”
“If you are going to value the earnings of a company with that, the valuation will drop immediately until after five (5) years, maybe when they will be able to derive value from the acquisition,” the Merchant Bank’s Head of Research explained.
But if Access Bank grows its earnings at a faster pace than its shares, its valuation by earnings per share may no longer be an issue for investors wishing to reap benefits of the transaction in the short term.
