Singapore's OCBC offers $4.95 billion for Wing Hang Bank in bet on China growth

By Saeed Azhar and Eveline Danubrata

SINGAPORE (Reuters) - Oversea-Chinese Banking Corp Ltd (OCBC) (SES:O39) has offered to pay almost $5 billion (3 billion pounds) for one of Hong Kong's last remaining family-owned banks, in a deal that would give the Singapore lender a much sought-after gateway to the Greater China region.

The deal to buy Wing Hang Bank Ltd was the outcome of months of negotiations, with the deadline for an agreement extended not once, but twice. OCBC formally made the offer to purchase the Hong Kong-based lender after reaching a deal with major shareholders including the bank's founding family.

OCBC, like other foreign lenders, are drawn to China's economic clout and the growth of its offshore yuan markets. Wing Hang, headquartered in Hong Kong, has branches in Shenzhen, Guangzhou and Macau - major hubs in the prosperous and bustling Pearl River Delta.

The acquisition, OCBC's biggest, would also help it narrow the gap with domestic rival DBS Group Holdings (DBSM.SI), which operates Hong Kong's sixth-biggest bank by assets.

At the same time, the deal comes as China's economic growth slows, prompting concerns about Hong Kong's loan exposure to Chinese companies, particularly those in industries that are suffering.

Still, Wing Hang's sale process had attracted interest from suitors including Agricultural Bank of China , Australia and New Zealand Banking Group (ASX:ANZ) and Singapore's United Overseas Bank (SES:U11).

OCBC is offering HK$125 a share to buy all the stock of Wing Hang, according to a joint announcement on Tuesday.

The offer came after Singapore second-biggest lender reached a deal with members of Wing Hang's founding Fung family, their affiliates and related family trusts, as well as BNY International Financing Corp, to buy a nearly 45 percent stake in the bank. OCBC also reached separate deals with other shareholders, increasing its stake to 50.66 percent.

OCBC has received in-principle approval for the purchase from Hong Kong and Singapore regulators, with formal approval needed by June 30 for the deal to go through. The acquisition is not subject to the approval of OCBC's shareholders.

If the deal goes through, there will be two family-owned banks left in Hong Kong - Bank of East Asia Ltd and Dah Sing Banking Group Ltd .

OFFER SIZE

Wing Hang and OCBC had been locked in exclusive negotiations since December after several players walked away from the deal on price concerns, sources had told Reuters earlier.

OCBC's HK$38.428 billion (2.97 billion pounds) offer announced on Tuesday is lower than expectations, with sources previously estimating the deal could be worth $5.3 billion.

"BNY Mellon is pleased to see an agreement has been reached between Wing Hang Bank and OCBC. The offer values Wing Hang at twice the book value, adjusting for the final dividend and the bank premises revaluation reserve," BNY Asia-Pacific Chairman Steve Lackey said in an emailed statement.

"BNY Mellon believes the proposal represents the best value for Wing Hang's shareholders and the bank as a whole and will be giving its full support to the offer."

Yue Xiu Group, the trading arm of China's Guangzhou city government, paid a multiple of 2.08 times to buy Hong Kong's Chong Hing Bank (1111.HK) last year.

The adjusted price-to-book ratio of 2.0 times paid by OCBC is more comparable to other M&A deals at the smaller Hong Kong banks, said Daiwa Capital Markets analysts Grace Wu and Samuel Ng in a note.

"Though the cash offer is shy of our and market expectations, given the size of Wing Hang, we believe the offer price is reasonable as it represents a 46 percent premium to WHB's closing price on September 16, 2013," when Wing Hang announced it is in talks for a sale.

Shares of OCBC rose 0.42 percent in Singapore trading around midday, following the announcement of the deal. Wing Hang Bank was up 0.24 percent in Hong Kong.

CHINA AND YUAN

About 6 percent of OCBC's pre-tax earnings in 2013 came from the Greater China region. Calculations by the bank show that if it had owned Wing Hang in 2013, the share of the contribution would have been around 16 percent.

But market watchers are warning that while non-performing asset ratios in China's banking system are at record lows of around half a percent, the number will only rise from current levels, a potential drain on profits.

Wing Hang is the biggest deal for OCBC CEO Samuel Tsien, who took the post in April 2012. The bank's last major purchase was completed in 2010 when it bought ING Group's (AEX:INGA) Asian private bank for $1.5 billion.

Tsien said at the Reuters ASEAN Summit last week that the bank aims to expand in Greater China which it sees as the engine of Asian economic activity, rather than in another market in Southeast Asia where OCBC is already well-entrenched.

Wing Hang was founded as a money changing business in 1937 but has grown into a mainstream retail bank with more than 70 outlets in Hong Kong, Macau and China.

Speaking at a news conference in Singapore on Tuesday, OCBC Chief Financial Officer Darren Tan Siew Peng said the bank plans to raise equity for the deal, but added that the exact timing and size depends on the progress of the acquisition.

OCBC is also planning to utilise a mix of internal resources and new debt.

OCBC is being advised by Bank of America Merrill Lynch (NYS:BAC), and Wing Hang by Goldman Sachs Group (NYS:GS), Nomura Holdings and KPMG.

(Additional reporting by Saikat Chatterjee in HONG KONG; Editing by Ryan Woo)