Giro owners face Sh695m paper loss in I&M buyout deal

Owners of Giro Commercial Bank are set to take a Sh695.4 million paper loss in the shares they are to be allotted in banking group I&M Holdings as part of their buyout deal by the Nairobi Securities Exchange-listed firm.

Giro Bank owners signed an agreement to sell all their shares for Sh2.5 billion in cash and also to receive 21 million I&M shares priced at Sh121.05 apiece — with the stock component also amounting to Sh2.5 billion.

The deal was reached last year when I&M’s share price at the NSE was trading in the Sh120 range.

The recent sharp drop in the stock price to Sh88 on Wednesday has, however, marked down the value of shares to be allotted to Giro owners by Sh695.4 million, with the acquisition planned to proceed without amendments.

“The intention of both parties is to proceed with the transaction on the current terms,” Gauri Gupta, general manager (corporate advisory) of I&M Holdings told the Business Daily.

This means the total value of the deal has dropped to Sh4.3 billion from the previous Sh5 billion, with existing I&M shareholders saving Sh695.4 million by having set what turned out to be a premium on the firm’s share price.

At Sh121.05 per share, the buyout rate represents a 37.5 per cent premium on the banking group’s closing price of Sh88 on Wednesday.

I&M said the stocks to be allotted to Giro’s shareholders were priced based on the volume weighted average price for the three months preceding July 31, 2015. The buyout of Giro was priced at double its net asset value.

READ: I&M values Giro Bank at Sh5 billion in buyout deal

I&M and other listed banks have seen their share prices fall significantly after a new law capping interest rates was signed on August 24, thinning margins for lenders.

The Banking (Amendment) Act 2016, which came into force on Thursday last week, sets the floor for deposit rates at 70 per cent of the Central Bank Rate and a ceiling for lending rates at four percentage points above the benchmark rate.

The rates capping has hurt the value and profitability outlook of all lenders, including small banks such as Giro.

Giro Bank is associated with the Gidoomal family. The chairman of the bank is Chandan Gidoomal with a token direct ownership of 13 shares while Prem Gidoomal, a non-executive director, has 17 shares. The bank’s chief executive is Sanjay Gidoomal.

Six investment vehicles, whose beneficial owners were not disclosed, hold most of the bank’s shares. They include Blanford Investments with a 21.76 per cent stake, Lombard Holdings (Sh17.5 per cent), Sentinel Investments (16.45 per cent), Laxmi Fibres (16.03 per cent) and Sunsheli (16.03 per cent).

Giro’s owners will get 21 million shares in I&M equivalent to a five per cent stake, diluting existing investors in the NSE-listed firm by a similar margin.

“It is envisaged that the acquisition would result in annual cost savings of approximately Sh60 million in addition to Giro’s estimated annual profit before tax of approximately Sh500 million,” I&M said in a circular to shareholders.