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Equity hedges Sh2bn in DRC bank acquisition

James Mwangi
Equity Group CEO James Mwangi. FILE PHOTO | NMG 

Equity Group #ticker:EQTY will pay the final Sh2.1 billion for its acquisition of a majority stake in DRC's Banque Commerciale Du Congo after two years in a move aimed at protecting itself against potential unforeseen liabilities in the target company.

The Kenyan bank has signed an agreement to buy a 66.5 percent stake in BCDC from George Arthur Forrest for $105 million (Sh11.1 billion).

Part of the money, Sh2.1 billion, will be kept in an escrow account and will be remitted to the seller over two years provided Equity does not encounter new liabilities in the DRC bank.

The Nairobi Securities Exchange-listed firm has disclosed the arrangement in a circular to its shareholders who will vote on the proposed transaction on June 30, 2020.

"The agreement further provides for a claims mechanism that enables Equity Group to seek compensation in certain circumstances post-completion and provisions that require $20 million (Sh2.1 billion) of the consideration to be held by an independent escrow agent for a period of up to two years post-completion that is available to offset any claims that might arise under the agreement," the circular reads.

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"Part of this escrow amount will be released 12 months after the completion date if there are no claims or any claims existing have been finally settled, while the balance will be released 24 months after the completion date."

Such escrow accounts are used in mergers and acquisitions and act as a bridge between the interests of sellers and buyers.

For buyers, for instance, they offer assurance that they can be compensated if the target company's financial health changes adversely due to various circumstances including larger-than-expected liabilities.

Equity says the transaction is aimed at deepening its regional diversification besides enhancing scale in DRC where it already owns another bank (Equity Bank Congo).

BCDC made a net profit of Sh800 million in the half-year ended June 2019 when it also held net assets of Sh8.5 billion.

"Following the BCDC acquisition, Equity expects to amalgamate the business of BCDC with that of Equity Bank Congo to create a single entity that will own and operate the combined business of both banks," the lender said in the circular.

"Equity expects that, at that point, the combined entity will rank first in DRC in terms of the reported book value of shareholders' equity and second in terms of the reported book value of total assets."

Acquisition of BCDC will raise Equity's investment in DRC to Sh17.8 billion. The Kenyan lender bought an 86 percent stake in Equity Bank Congo for Sh6.7 billion.

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