On April 24, the ISX website reported that Mosul Bank (BMFI) will hold a general assembly meeting on May 22 to discuss a possible merger with Union Bank (BUOI). A capital increase via a rights and bonus issue is also on the agenda.
The evident objective of such a merger would be to satisfy the central bank, which is requiring all private-sector banks to raise capital to IQD 100 bn by June. Separately, BMFI and BUOI would have to double their existing IQD 50 bn capitalizations. Together, they would immediately hit the target.
Aside from helping to satisfy the CBI’s requirement, however, it’s not clear that this deal serves any other purpose for BMFI. With only two branches—one in Baghdad and one in Erbil—BUOI just doesn’t have much of a franchise. BMFI already has branches in those two locations along with another nine in Mosul, two in Ninevah, and one each in Tikrit and Sulaymaniyah. BMFI also has over four times the deposit base of BUOI and more than twice its loan book.
Nor is BMFI actually short of capital. Like many Iraqi banks (including BUOI), its biggest single asset is cash. As of its September, 2010 balance sheet, its cash/deposits ratio came to 86%; its loan/deposit ratio was 55%.
Clearly BMFI shareholders should expect to hold more than half of the merged entity. A fair deal for them should be based on market capitalization rather than on the fact that the two banks have the same share capital.
During the past sixty trading days, BMFI’s average market cap has been 31% higher than BUOI’s. That would suggest giving each BMFI shareholder 0.57 shares in the new company for each of their existing shares, while each BUOI shareholder got 0.43 shares (57 being 31% more than 43). (Naturally this would have to be adjusted once the details of BMFI’s planned capital increase are made public.)
Such a deal would be equivalent to valuing BUOI at close to par, as its average share price over the past sixty trading days was IQD 1.01. This is not unreasonable given that its share capital is really all it would be bringing to BMFI’s merger of convenience.