Diamond Trust Bank (DTB) #ticker:DTK booked a bargain purchase gain of Sh59.8 million on acquisition of Habib Bank Limited’s (HBL) branch operations and assets.
The bank has disclosed that it paid Sh1.76 billion to take up assets of HBL that were valued at Sh1.82 billion, leading to the gain.
The transaction was completed in August 2017 with DTB issuing 13.28 million shares to HBL as the consideration for the net assets acquired.
“The fair value of the ordinary shares issued was based on the listed weighted average share price of the company for a period of six months up to 31 July 2017 of Sh132.89 per share amounting to Sh1.76 billion,” DTB says in its latest annual report.
In accounting terms, a bargain purchase gain arises when assets of a particular entity are acquired for a cost that is less than what its assets can fetch when sold at open market.
The major assets acquired in the transaction included Habib’s Sh6.1 billion deposits and balances due from banking institutions as well as loans and advances to customers valued at Sh2.7 billion.
DTB says the deal helped it strengthen its position and build relationships in new geographical areas including growth frontier markets in Asia within the markets where HBL had operations.
“The completion of the transaction, among others, increased DTB’s market share, augmented its capital base, enhanced its operational leverage and diversified its presence,” it said.
The disclosure comes a month after Mauritian lender, SBM Holdings, also said it booked a gain of Sh3.82 billion when it carved out assets and liabilities from the collapsed Chase Bank Kenya in May 2017.
Such gains mean that the acquisitions are immediately profitable for the buyers.
In most cases, acquirers have to wait for years before the acquisitions can work out and deliver incremental earnings.
Other deals have seen acquirers write off all or part of their investment after paying too much.