Kiatnakin Bank

Kiatnakin Bank Plc (KK)

Investment thesis: On Friday, KK announced that in 3Q12 it plans to merge with PHATRA, one of Thailand’s most profitable securities firms. We calculate that the merger will boost our KK earnings forecasts significantly for FY12 and FY13. However, we maintain our model unchanged for the moment because the deal won’t be completed till 3Q12. Additionally, KK’s share price has rallied 31% since Nov 21 (PHATRA’s has rallied only 13% since Nov 21). From a tactical trading standpoint, we expect KK’s share price to drop back until there are new developments on the PHATRA merger front.
Details of deal: The share swap ratio is PHATRA Capital (PHATRA) 0.9135 for one KK share. PHATRA’s market capitalization is Bt7.3bn, while KK’s is Bt22.9bn. The bank intends to hold at least 75% of the shares in PHATRA by the time the share swap is completed in 3Q12. KK plans to issue 192m new shares for the share swap, which implies 23% share dilution (assuming that all current PHATRA shareholders participate in the share swap or the tender offer KK will be required to make after the share swap). PHATRA’s 2H12 profit will go to KK’s bottom-line if the deal is done.
Too soon for KK-PHATRA arbitrage: Tactically, although the shareholders of PHATRA appear to be positioned to benefit more than those of KK from the merger and KK’s stock price has increased more than twice as much as PHATRA’s since Nov 21, we don’t see much scope for arbitrage. We simply think that KK’s stock price looks a bit frothy at the moment and it’s a good time for traders to lock in profits. Arbitrage will have to wait until we are closer to the share swap date—there might be scope to profit by selling PHATRA into the tender offer that will follow the share swap.
What the merger would mean: The deal presents a fundamental win-win scenario. A much bigger capital base would enable PHATRA to take larger slices of big-ticket underwriting deals (PHATRA’s current paid-up capital is Bt1bn; KK’s is Bt6.3bn). Also, being part of a bank would make funding costs much cheaper for PHATRA than they are currently. On KK’s side, it takes delivery of one of Thailand’s leading stockbrokers (with an excellent investment banking operation) and a new source of income—income that should expand substantially with the greater capital size and cheaper access to finance afforded by the merger.