Banco Santander Mexico (BSMX) – Expected Higher Offer – Upside TBD

Current Price: $6.19

Offer Price: $6.21

Upside: TBD

Expected Closing: Q3 2021

Press release

This idea was shared by Tom.

 

This is a very short 1 day play on a potentially sweetened privatization offer with downside being fully protected by the current offer price.

A major global banking conglomerate Santander Group intends to take its Mexican subsidiary (owns 91.7%) Banco Santander Mexico private and has announced a mandatory delisting offer at Mex$120 per each ADS (BSMX) in cash. Before closing, shareholders will also receive a dividend of Mex$2.25 per ADS. 1 ADS equals 5 common shares, which trade on Mexican Stock Exchange. The transaction has to get approval from 40% of minority shareholders - the meeting date is set for the 9th of June - 12:00 PM ET time. After that, the buyer expects to launch a tender offer with an expiration date in in Q3 (likely early into the quarter). 0.5% spread remains likely due to currency risk, however, there is also quite a decent chance that remaining shareholders will reject the current offer forcing the buyer to raise the price. There is substantial headroom for a positive offer adjustment.

The buyer is definitely credible and already owns 91.7% of BSMX. The acquisition comes as Santander Group's strategy to deploy more capital in Americas and accelerate growth in NA. The buyer expects that this transaction will result in 14% of return on invested capital, improve its EPS (buyer's) by 0.8% in 2023 and increase group's capacity for organic capital generation. Overall, the chance of proposal withdrawal is low.

The biggest caveat seems to be shareholder approval condition - the mandatory offer has to receive approval from 95% of BSMX shareholders. Excluding buyer's stake, 40% of minority shareholder's consent is needed. In comparison, this is not a big threshold and there are some supporting points in favor of the acceptance - relatively low liquidity of the current stock and 24% premium to the pre-announcement price, which the buyer claims to be the largest premium of similar transactions on the Mexican Stock Exchange (PR):

This premium is the highest of comparable transactions in the Mexican market (16.2% on average) and fully reflects the pre-announcement consensus target price of 24.5 MXN/share.

Nontheless, the offer seems opportunistic and despite subsiding impact from the pandemic (see more in the section below), it comes at a discount to BSMX the pre-COVID price levels (Mex$25-Mex$27/share). The offer is also priced at 8.8x TTM PE and 1.14x P/TBV. Tangible book value multiple is significantly below the historical, pre-COVID multiple valuations of the target co (see the table below):

Note: data is provided in Mexican dollars.

The proposal is also substantially below similar sized peer valuation - Grupo Financiero Banorte (Mexico) and Banco Santander Chile both trade around 2x TBV. Worth mentioning that in comparison both peers were slighlty more profitable historically, but both reported 15% ROE in 2020 (vs 13.4% by BSMX).

It is interesting that two major proxy firms disagreed on whether to recommend voting in favor of the mandatory delisting - ISS recommended to vote against, while Glass Lewis supported the transaction. ISS backed up its decision with these words:

The offer from the parent company does not appear to include a premium while considering historical valuation ratios vs. peers and its current expected level of profitability and the free float has very good liquidity in relative terms

The bottom line is that there is a decent chance that the buyer will decide to raise the price if not enough shareholders tender their shares. It has already updated the offer once - at first the dividend was to be deducted from the consideration, but two months later it was revised that the dividend will now go on top of the offer price. This shows that the parent is really motivated to close the deal, which is not surprising given the current valuation.

 

Banco Santander Mexico

This is one of the largest banks in Mexico with 1352 branches and offices around the country. BSMX mostly focuses on commerical loans:

BSMX has been affected by the COVID, however, the impact is now subsiding and the company sees recovery going forwards (PR):

Mortgages and auto loans continue to perform extremely well, as we again grew above market and gained share while maintaining prudent origination criteria. We have fully absorbed the negative impact of the pandemic, mainly in consumer loans, credit cards and SMEs and we are well positioned to support our customers on the recovery path ahead.[...] While loan volumes in these segments show year on year contractions, we expect to see a gradual turnaround moving forward.

Overall, the impact from pandemic doesn't seem like a major problem for BSMX -  it's non-performing loans % is dropping and is not that much higher than at pre-COVID levels. Moreover, the bank is continuing to shift towards less risky segments (mortgage, auto loans, etc.). Mortgage loans is BSMX's fastest growing segment (BSMX is one of the major Mexican players with 17% market share), which strongly supported the overall loan portfolio performance during the pandemic mortgage segment increased 14.2% in Q1'21, 13.8% in Q4'20, 10.8% in Q3'20 and 9% in Q2'20.

 

4 COMMENTS

  1. snowball

    I assume that there is also going to be an ADR cancellation fee of 5 cents per ADS at the time delisting, which will reduce the offer consideration by about 0.8%.

    BXMX is currently ( 3.30 pm EST on June 9) trading at 2.5% above offer (or 3.3% if cancellation fee is deducted).

    When will the voting result be announced? I guess investors are now expecting a high chance of a sweetened offer.

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  2. Ilja

    Strange, but apparently possitive development so far. 1 day before the meeting the buyer changed the offer from a mandatory delisting to a voluntary tender offer and cancelled the 95% approval condition. The price remained unchanged and Santander Group now expects to receive necessary regulatory approvals for the voluntary tender before the 31st of July. The way they’ve changed the offer in the last minute signals that the buyer was aware that the proposal won’t go through at the current price. The market took these events positively and BSMX currently trades at 2% above the offer price. I think the thesis here still stands and BSMX remains cheap at these price levels. It is unlikely that the buyer will manage to get any significant shares in the upcoming tender, so another price raise seems possible. The only negative, of course, is that they’ve refused to increase the price just now and might hold back on the privatization if the upcoming tender fails.

    Would appreciate you thoughts on this, Tom.

    https://www.bamsec.com/filing/95010321008599?cik=1698287

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  3. Lukas

    BSMX released Q2 results showing increased profitability:
    – EPS of Mex$0.7 vs Mex$0.62 in Q2’20 and Mex$0.48 in Q1’21;
    – ROE increased to 11.8% and ROA to 1.1%.

    BSMX trades at around 1.06x diluted TBV, which seems very cheap historically (although profitability hasn’t really recovered to pre-COVID levels as well). No news on the tender offer so far, but assuming profitability continues to recover, Santander will likely resume the privatization at this historically cheap price.

    https://www.prnewswire.com/news-releases/banco-santander-mexico-reports-second-quarter-2021-net-income-of-ps4-713-million-301343754.html

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