Equity Group #ticker:EQTY is set to get a Sh13 billion discount on its purchase of four banks in Rwanda, Zambia, Mozambique and Tanzania from a London-listed investment group.
Atlas Mara Limited says through its trading report to the London Stock Exchange (LSE) that it marked down the value of the four banks after the Equity Bank deal prompted a due diligence on their financial health.
Equity Bank will offer 6.72 percent of its shares worth Sh10.9 billion to Atlas Mara, meaning that the valuation of the four banks dropped by more than half. This is a reflection that Atlas had weak earnings.
The Kenya lender is set to acquire Atlas via a share swap. It will get 62 percent of the share capital of Rwanda’s Banque Populaire du Rwanda and 100 percent of African Banking Corporation of Zambia, African Banking Corporation Tanzania and African Banking Corporation Mozambique.
The lower valuation was big enough to drag Atlas Mara into a net loss of nearly the same amount (Sh13.1 billion) in the half year ended June, according to a trading update by the multinational.
Atlas Mara says the deal with Equity triggered a re-measurement of the value of the four banks “to the lower of cost or fair value less cost to sell, resulting in a loss of $125.6 million (Sh13 billion).”
As a result of this re-measurement, the group reported a net loss after tax for the first half of 2019 of $126.4 million (Sh13.1 billion) compared to $28.6 million (Sh2.9 billion) profit for the prior year period.
Atlas Mara says the valuation drop is mainly due to writing off intangible assets and the premium it had paid when acquiring the four banks.
Some of the subsidiaries are in losses and, in aggregate, the four lenders reported a low return on equity of two percent in 2018, according to previous disclosures by Atlas Mara.
The London-listed firm sees the transaction as an opportunity to take a stake (6.27 percent) in Equity, which is one of the most profitable banks in the region, and which celebrated 35 years last week.
“Confirmatory due diligence has been substantially concluded and the group expects to announce the final terms of the transaction in due course,” Atlas Mara said of the deal with Equity.
The multinational could further raise its ownership in Equity by buying more shares for cash, according to the deal terms.
Atlas Mara, whose offices are in the British Virgin Islands, could receive further unspecified compensation from Equity in the future conditional on improved performance of the subsidiaries it is offloading.
For Equity, the deal gives it a piece of the Zambia and Mozambique market, adding to its current presence in Kenya, Tanzania, Uganda, South Sudan, Rwanda and the Democratic Republic of Congo (DRC).
The Kenyan bank will merge its subsidiaries in Rwanda and Tanzania with those of Atlas Mara, a move that will help it reduce costs and enhance scale.
The four banks to be acquired by Equity had a total of 2,641 employees in 2018 while their customer base and loan book in the same period stood at 822,000 and Sh51.8 billion respectively. They also had deposits of Sh96 billion in the review period.
The proposed deal marks the Kenyan bank’s increased acquisition appetite in recent years.
Equity is also simultaneously seeking to acquire a controlling stake in Banque Commerciale du Congo (BCDC) in a cash transaction.