Dexia Israel Bank (DXIL.TA) – Merger Arbitrage – 9% Upside

Current price: ILS 692

Offer Price: ILS 758.59

Upside: 9%

Expiration Date: April 2019

This idea was shared by Vladimir.

 

Dexia Israel Bank (TASE:DXIL) agreed to be acquired by Mercantile Discount Bank (third largest in Isarael) for approximately ILS 670m or 758.59/share on November 13, 2018. 

Closing of the transaction is conditional on (more details on each point are provided in the write-up below):

• Approval by the Antitrust Commissioner – the biggest risk for this transaction and likely the main reason for the spread to exist. Nevertheless, it is likely to pass given that Dexia does not work in retail banking but rather public and municipal financing.

• Approval by the Bank of Israel – should not be an issue due to recent approval of another large size bank merger.

• Approval by 75% of shareholders is expected to pass due to fair offer price relative to BV value as well as large premium to unaffected price.

• And other customary conditions related to MAC, etc.

Downside risk is limited given a competing bid from Bank of Jerusalem at ILS 730/share – still 5.5% premium to current share price.

Dexia Israel Bank would merge with and Mercantile Discount Bank by way of a contractual merger. The management of Dexia Bank and its subsidiary, whereby their operations in the normal course of business will be conducted as they were prior to the date of signing the merger agreement.

If the closing date of the transaction falls after April 1, 2019, the consideration will be increased by an amount of ILS 1.25 million (0.2%) per month or pro-rata thereto.

 

History and Background

Dexia Israel Bank was part of the international banking holding Dexia SA with Belgian roots before March 2018. Dexia SA wanted to sell Israel subsidiary since crisis 2008. In addition, the sale of the non-core businesses outside of the key regions was a condition for the aid from French and Belgian government.  The sale was complicated by 5 different share classes so it took nearly 10 years to consolidate share capital and prepare the company for sale. The original plan for Dexia SA was to sell the controlling stake in Dexia Israel Bank (58.9%) to the interested parties: Bank of Jerusalem, Isreal Discount Bank and Mizrahi Tefahot Bank, but Bank of Israel wanted Dexia Israel Bank stay independent, so sale of controlling stake was done through the public placement at ILS 674 per share (13% discount to the spot market) to institutional investors in March 2018.

However, some time later the position of Bank of Israel changed. After placement of Dexia controlling stake into the market company received merger offers made by Bank of Jerusalem and Israel Discount bank. After that, Dexia announced that its board of directors had decided to hire the Value Base investment bank to help with the sale.

Dexia Israel Bank provides banking services to the public and municipal sectors in Israel. Bank is micro cap with only $169m market cap. Acquisition offer values the bank at 1.1x P/B.

Discount Bank is a commercial bank that offers portfolio management, financing, securities trading, and underwriting services. It also provides long and short term credits, saving schemes, investment solutions, home loans, foreign trade and currency exchange facilities. It has market cap of $4.2bn and trades at slightly less than 1.0 P/B.

Other larger Israel banks tend to trade around 1x – 1.1x P/B.

 

Approval of Dexia Bank shareholders

Discount bank’s offer is a 17% premium on Dexia’s market value before the announcement and provides a premium of 11% to the bank’s BV. Moreover, Discount’s offer is 12% above the equity offering price tag last March. Adding on top the ILS 91/share dividends paid in the interim results in premium of 26% relative to the sale of controlling interest in March 2018 at ILS 674 per share.

There is also another bid from Bank of Jerusalem made on November 8, 2018 for the total consideration of 730 ILS (9% premium to Discount bank offer). I didn’t find any information on DXIL response to the increased bid from Jerusalem, but I think it may be a good floor in case merger with Discount bank for some reason won’t happen. Given the smaller size of Bank of Jerusalem, any antitrust issues should be far less prominent.

Dexia Israel Bank shareholders include the investment houses Meitav Dash (7%), Halman-Aldubi (5.3%) and Psagot (5%), as well as the Local Authorities Center (6.5%) and Israeli-British entrepreneur Teddy Sagi with nearly 2.5%.

 

Approval by the Bank of Israel

The Bank of Israel is likely to look favorably on the deal. It had recently approved the Mizrahi-Union merger plan (third largest and sixth largest banks at the time) only to be overruled by the antitrust authority.

The Bank of Israel, the country’s banking regulator, has been a longstanding supporter of the proposed deal.

Supervisor of Banks Hedva Ber told reporters on Wednesday the merger would not hurt competition but would help it by enabling a mid-sized bank to compete more effectively with Israel’s two largest lenders — Hapoalim and Leumi .

These two together hold a 56 percent share of the bank credit supply market. The remaining 44 percent is held by the next three banks.

Approval by the Antitrust Commissioner is the main risk

Israel’s Anti-Trust Authority in May rejected a planned merger between Mizrahi Tefahot Bank (4th largest in Israel) and smaller rival Union Bank of Israel, a decision the two banks are appealing.

Dexia does not work in retail banking but rather in public and municipal financing.

Mizrahi operates in retail market with market cap of $4.3bn, Union bank of Israel is smaller, with market cap of $314m (though book value is $700m) and also operates in retail market.

While there is obviously a risk that regulator may block the transaction between Dexia and Discount bank, I don’t think that this risk is particularly high in this situation.