Danamon Deal Priced to Fail Over Singapore Bank Clash: Real M&A

Nov. 21 (Bloomberg) — PT Bank Danamon Indonesia is trading at the biggest discount to any pending takeover offer in Asia, signaling arbitragers aren’t convinced that Singapore and
Jakarta will resolve differences over bank access anytime soon.

DBS Group Holdings Ltd.’s $6.85 billion proposal to buy
Danamon is in limbo as the Singaporean bank awaits regulatory approval from Indonesia. While new rules governing ownership of Indonesian lenders offer DBS a path to full control, Danamon’s stock closed 15 percent below the bid yesterday, indicating
traders who profit from acquisitions have less faith in this transaction closing than any other pending deal greater than $1 billion in Asia, according to data compiled by Bloomberg.

As it weighs DBS’s request, Indonesia’s central bank is
pushing for more access for its own lenders in Singapore. That’s a request the Monetary Authority of Singapore, known as MAS, won’t easily grant as it seeks to maintain control over the
city’s banking system, said Religare Capital Markets Ltd. A
collapsed deal would send Danamon plummeting as much as 23
percent to levels last seen before the bid was announced in
April, according to OSK Research.

“There’s a huge, huge question mark” over the proposal,
Jonathan Foster, Singapore-based director of global special
situations at Religare, said in a telephone interview.
“Singapore is justifiably very proud and protective of what has been an extremely strong banking sector. It’s pretty unlikely that you’re going to get MAS making concessions that would be seen to be lowering the standard in any way.”

Seeking Access

Danamon rose 0.8 percent to 6,000 rupiah a share in Jakarta
today. DBS fell 0.8 percent to S$13.71 in Singapore.

DBS will be guided by Bank Indonesia, the country’s central
bank and primary banking regulator, “every step of the way,” Karen Ngui, a Singapore-based spokeswoman at DBS, wrote in an e- mailed response to questions.

“The transaction is still under process,” Zsa Zsa
Yusharyahya, a Jakarta-based spokeswoman for Danamon, said in a text message. “We are working closely with Bank Indonesia.”

DBS, Southeast Asia’s largest lender, said on April 2 it
planned to acquire Danamon in a two-stage process — first
obtaining the 67 percent currently held by Singapore investment fund Temasek Holdings Pte, and then making a 7,000 rupiah-a- share cash offer for another 32 percent. The entire takeover is valued at about 66 trillion rupiah ($6.85 billion).

Less than two weeks later, Bank Indonesia said it was
seeking equal access for Indonesian lenders looking to expand in Singapore, without specifying the details of such reciprocity. By the end of April, the central bank said a review of the bid would also wait for new bank-ownership rules.

MAS’s dealings with other regulators are confidential, an
official at the central bank said in response to a request for comment. Officials at Bank Indonesia didn’t reply to several requests for comment on the status of DBS’s bid.

Ownership Rules

Danamon, which fell as low as 4,900 rupiah by early June,
30 percent below the bid, ended at 5,950 rupiah yesterday, still 15 percent less than the offer. That’s the widest spread of any takeover greater than $1 billion in Asia, data compiled by
Bloomberg show.

The gap exists even though Indonesia’s new ownership rules
seem to include “sufficient flexibility” for DBS’s proposal to proceed, Fitch Ratings said in an interview in July.

“There is room for this acquisition to be approved, but
the problem is currently there is a lot of sentiment against foreign control over Indonesian banks,” Andy Ferdinand, an
analyst at PT Batavia Prosperindo Sekuritas, said in a phone interview from Jakarta. “A number of parties have been
expressing concerns about how hard it is for Indonesian banks to expand abroad so they think we should use this as momentum to put pressure on foreigners.”

New Rules

Any lender seeking to purchase more than 40 percent of an
Indonesian bank must meet capital adequacy requirements and be committed for a “certain period of time,” according to
regulations released in July. The acquirer also needs to show good corporate governance for three consecutive assessment
periods over a five-year span, the bank said, without specifying the length of each assessment period.

“If you take the regulations literally, then any attempt
to take a majority stake is something that happens over a number of years,” said Foster at Religare. It means DBS getting to a point where it can make an offer to Danamon shareholders other than Temasek “is a long way down the track,” he said.

Singapore is unlikely to agree to concessions that could be
seen as lowering its governance standards just “to lubricate the wheels for an offer for Bank Danamon’s minority
shareholders,” Foster said.

Governance Standards

Any buyer of a Singapore bank must obtain government
approval before crossing ownership thresholds of 5 percent, 12 percent and 20 percent, and only one Indonesian lender, PT Bank Negara Indonesia, has a full bank license, MAS’s website shows.

“MAS has run the banking sector in Singapore in a much
more closed manner than regulators in Indonesia,” Hans W.
Vriens, managing partner of consultancy Vriens & Partners Pte in Singapore, said in a phone interview. “The Indonesians say:
‘Wait a minute, why can’t there be more reciprocity? Why can’t we own banks, let alone have ATMs in Singapore?’”

Bank Indonesia may decide that DBS is a better owner for
Danamon than Temasek, said Manu Bhaskaran, Singapore-based
partner at policy advisory firm Centennial Group.

Regional Rivalry

“From Bank Indonesia’s perspective, a change of
shareholder from Temasek, a foreign fund, to DBS, an actual
commercial bank, is probably seen as a positive,” he said in a phone interview. “I wonder how much of an issue this thing
about reciprocity really is.”

Still, Indonesia’s politics, including a long-standing
rivalry between the nation and neighboring Singapore, may also influence Bank Indonesia’s decisions, according to Vriens.

“The issue is not whether foreign investment is good for
their country,” he said. “The issue is if the political class allows foreign investors to own majority stakes in its banks. Any big investment from Singapore is sensitive because of the Singapore-Indonesia relationship.”

Outside Singapore, DBS generated only 7.3 percent of its
revenue from South and Southeast Asia in the first nine months of the year, company filings show. Even a smaller stake in
Danamon, which has 3,000 branches and about 6 million customers, would benefit DBS, said Rocky Indrawan, a Singapore-based
analyst at OSK Research.

Economic expansion in Indonesia, Southeast Asia’s fastest-
growing economy, will average 6.4 percent from 2013 to 2017, the Organization for Economic Cooperation and Development estimated in a report this week.

Potential Decline

If Indonesia withholds approval for a full takeover, DBS
may strike a new deal with Temasek at a new price, Indrawan

“The proposed transaction is still waiting for all
necessary regulatory approvals, so it is not appropriate for us to comment,” Jeffrey Fang, a spokesman for Temasek in
Singapore, wrote in an e-mail.

Should DBS walk away, Danamon could drop as much as 23
percent from yesterday’s closing price, Indrawan said.

“The final details and pricing of the deal could still
change,” he said in a phone interview. “DBS’s offer of 7,000 rupiah per share was based on the initial assumption that DBS is able to acquire the entire bank, but that assumption has changed now. Assuming the DBS deal does not go through at all, Danamon’s share price could revisit pre-deal price of 4,600 rupiah where the market was pricing it based on existing fundamentals.”

To contact the reporters on this story:
Sanat Vallikappen in Singapore at
vallikappen@bloomberg.net ;
Angus Whitley in Sydney at
awhitley1@bloomberg.net ;
Harry Suhartono in Jakarta at
hsuhartono@bloomberg.net .

To contact the editors responsible for this story:
Chitra Somayaji at
csomayaji@bloomberg.net ;
Sarah Rabil at
srabil@bloomberg.net ;
Darren Boey at
dboey@bloomberg.net .

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