EFG International AG is buying BSI from Brazil’s Grupo BTG Pactual SA in a 1.33 billion Swiss-franc ($1.34 billion) deal that will create Switzerland’s fifth-largest private bank. The shares fell the most in seven months.
The combined firm will manage about 170 billion francs in revenue-generating assets, Zurich-based EFG said in a statement Monday. The lender plans to raise about 750 million francs of capital to finance the purchase, which will include about 975 million francs in cash and the rest in stock.
“We see a high execution risk and note the short-term prospects look very challenging,” Mainfirst analyst Tomasz Grzelak wrote in a note, citing the “large” rights issue, high restructuring costs and an uncertain economic environment. He rate the stock neutral.
BTG Pactual, which has owned BSI for less than a year, is selling assets after former Chief Executive Officer Andre Esteves was arrested in November amid a widespread corporate corruption scandal. Esteves, who has since been released from jail and is under house arrest, has denied any wrongdoing through his lawyers. The combined bank will be among the top five Swiss private-wealth managers, Bloomberg calculated based on company filings.
EFG fell as much as 11.2 percent in Zurich trading, the most since July 29, and was priced at 6.02 francs as of 5:04 p.m. The stock has dropped 43 percent in the last 12 months, giving the company a market value of 915 million francs.
Risky Move
“Financing a transaction in such an environment with a rights issuance can become a risky move,” said Thomas Braun, a fund manager at Classic Fund Management AG who holds 2.2 percent in EFG. However if the deal is managed well, EFG could double its share price in the long run, he said.
After the combination, EFG will be the biggest Swiss private bank after UBS Group AG, Credit Suisse Group AG, Julius Baer Group Ltd. and Pictet & Cie. Group SCA, according to a presentation by EFG Monday.
The deal will create cost savings of about 185 million francs before tax by 2019 and contribute to EFG’s earnings per share from 2018, the company said. BTG Pactual will own about 20 percent of EFG as a result of the transaction and have representation on its board.
Surprisingly Expensive
“The cost savings target doesn’t seem very ambitious,” Andreas Venditti, an analyst with Vontobel with a hold rating on EFG, said by phone. “What surprises me is that EFG is paying more for BSI than BTG did. The situation for banks has deteriorated, so one might have expected a lower valuation.”
EFG Group will be the largest shareholder in the combined company with more than 35 percent, according to the statement. Talks between EFG, the investment company of Greek billionaire Spiro Latsis, and BTG Pactual were reported in January.
EFG’s full-year net income fell to 57.1 million francs from 61.4 million francs a year earlier, the bank said in a separate statement. Operating income declined about 3 percent to 697 million francs.
“EFG has always been wishing to enlarge itself in a material way and there hasn’t
been any opportunity of size,” said Ray Soudah, the founder and chairman of Millenium Associates AG, a Zurich-based independent mergers and acquisitions adviser. “The timing to go for BSI was just right, it was the first sizable opportunity in the last years and there won‘t be a similar opportunity in the next two to three years.”