Amwal Capital Partners for Sohn Invesment Conference
- 2. This material has been prepared by Amwal Capital Partners (DIFC) Limited (“ACP”) located at Level 19, Index Tower Dubai International Financial Centre, Dubai, united Arab Emirates. ACP is regulated by the Dubai Financial Services Authority (“DFSA”). This material is provided for informational purposes only and is intended for Professional Clients as defined by the DFSA Conduct of Business module, and must not be relied upon by any another person The information contained herein may include “forward looking statements.” All statements other than statements of historical fact may constitute forward looking statements. These statements are based on beliefs and assumptions, which we believe are reasonable. However, we can give no assurance that these expectations will prove to be correct and actual results may differ significantly than those discussed in the forward looking statements included herein. The information provided herein is for use by the recipient only, and is not to be shared with others. No part of such information may be made available, published, reproduced, displayed or redistributed to any third party without the prior written consent of ACP. Logos, brands and other distinctive signs used herein are among the registered and unregistered trademarks of ACP or other companies of its group or partners. Information contained herein does not constitute an offer to sell any securities in any jurisdiction, included but not limited to the U.S., in which such distribution or offer is unlawful or not authorized or where they are not available for distribution in the jurisdiction of the reader of this information. The information contained herein is believed to be reliable as of the date on which this material was issued and has been obtained from internal and external sources believed to be reliable. ACP does not endorse nor does it make any representation concerning the accuracy, completeness and reliability of the evaluations, opinions, statistics and statements referred to or reproduced herein. ACP disclaims any warranties regarding the information provided by third parties referred to herein and accepts no liabilities whatsoever arising from any losses or damages suffered by reason of the use, or misuse, of these third parties’ contents. Past performance is no guarantee nor is it necessarily indicative of future results, and no representation or warranty, express or implied, is made herein regarding future performance. The value of the securities or financial instruments mentioned herein (including the income derived therefrom) may be adversely affected by changes in market prices and exchange rates, the imposition of taxes and other factors. Disclaimer 2
- 3. Do you know the difference between these two? 3 The Garden 1925 By Joan Miro Blue City 2002 By Dia Azzawi
- 4. No, I am not here to talk about Arts… 4 The Garden 1925 By Joan Miro Blue City 2002 By Dia Azzawi Modern art refers to the period that began in the 1880s and that lasted until the 1960s. Contemporary art can be said to be the art that was developed after the 1960s. It is one created by artists who are still living. If Global Developed Markets are Contemporary Arts, MENA Markets are Modern Arts. MENA markets have not yet reached their maturity and are still in an exploratory mode. …MORE ARBITRAGE OPPORTUNITIES…
- 5. 5 MENA Markets Features MENA being Saudi Arabia, UAE, Qatar, Kuwait, Bahrain, Oman, Jordan, Lebanon, Egypt, Morocco 2,751 703 1,362 4,801 364 1,669 1,393 Brazil Russia MENA India Indonesia Turkey South Africa Average daily traded value (2018, ADVT USD mn) Market Cap (2018, USD bn) 896 540 1,141 1,933 427 148 468 Brazil Russia MENA India Indonesia Turkey South Africa Company Count 279 201 1,355 3,000 580 390 300 MSCI Emerging Market Index Country Breakdown 32.3% 12.2% 11.8% 8.6% 7.5% 4.9% 4.1% 18.7% 0% 13% 25% 38% 50% China Korea Taiwan India Brazil South Africa Saudi, Qatar, UAE Others Market Cap Breakdown by MENA Country (2018, USD bn) 43% 21% 14% 22% 0% 20% 40% 60% 80% Saudi Arabia UAE Qatar Other MENA % of MENA ADVT 69% 8% 5% 18% Source: Bloomberg; IMF
- 6. 6 Saudi Market Ownership & Value Traded by Nationality* * For the month of September 2019 26% 62% 64% 12% 2% 3% 9% 24% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Market Ownership Value Traded Saudi Individuals Saudi Institutions GCC Investors Foreign Investors As a proxy to the region, the Saudi market is 26% owned by Saudi Individuals. These Individuals represent on average c.62% of the ADVT. The Saudi Market remains a retail driven market Source: Tadawul
- 7. 7 Our Trade idea Our trade idea is a Merger Arbitrage specific to the MENA markets. What’s the big deal in a Merge Arbitrage? A totally distorted risk / reward profile …thankfully tilted towards the REWARD side! A Modern Art version of the Merger Arb
- 8. 8 Typical Return Profile of Merger Arbitrage Spread Risk Reduction Factor (time) Offer Due Diligence Boards Approval Regulatory Approvals Anti-Trust AGM Approval Deal Completion
- 9. 9 Example of Global Merger Arbitrage: Fiserv Inc. acquisition of First Data Corp -5% 0% 5% 10% 15% 20% 25% 30% 35% Offer & BoD Approvals AGM Approvals Completion Spread % (1) 1. Spread: The difference between the theoretical price of First Data divided by its current price on the NYSE Source: Bloomberg
- 10. 10 What if we show you this return profile? Offer Due Diligence Board Approval Regulatory Approvals Anti-Trust AGM Approval Deal Completion Return Risk Reduction Factor (time) Return does not really compress until very close to closing despite transaction risk HEAVILY DIMINISHED `
- 11. 11 How can this discrepancy in Merger Arbitrage happen in MENA? Contemporary: Developed Modern: MENA Markets Efficient Asymmetrical & inefficient Investors Type More Institutional More Retail Transparency Strong IR function & Information Depth Weak IR with poor disclosures Regulator Enforcement Very Strong Evolving Depends on Market Research Coverage Very Strong Limited to large Caps Shorting Tools Direct Synthetic Inventory Abundant – non callable Not always available - callable Cost of Borrow Minimal Relatively Expensive Usually Driven by Management BoD & Major Shareholders
- 12. 12 Merger Arbitrage in MENA Short SABB – Buy ALAWWAL ➢ Merger Background ✓ Country: KSA ✓ Parties: SABB (local outfit of HSBC) & ALAWWAL (The local outfit of RBS/ABN Amro) ➢ Merger Mechanics ✓ Exchange ratio: One ALAWWAL share was exchanged for 0.4853 shares of SABB ✓ SABB Shareholders would own c.73% of the post-merger entity ➢ Merger facts ✓ Saudi is the biggest market in MENA with the lowest banking penetration. ✓ First listed banking merger ever in Saudi Arabia and first banking merger in 20 years ✓ A paradigm shift by the Regulator - favoring consolidation over issuing new licenses ➢ Rationale for transaction ✓ Cross shareholding: consolidation of main shareholders stakes in both entities (Olayan) ✓ Business and Management Alignment: Create the third largest bank by assets – USD 70bn ✓ Synergies: merged entity target a 2-3% of combined revenues; cost synergies of 15-20% of combined cost base
- 13. 13 Merger Arbitrage in MENA: Short SABB – Buy ALAWWAL The Check List: ➢ Regulator Approval: Validated the thesis of regulatory alignment and approval considering the policy change of SAMA, the Saudi Central Bank ➢ Validated BoD & shareholder alignment; ✓ Cross shareholding ensuring better alignment and higher likelihood for merger ✓ BoD Alignment: Spoke with board members / shareholders and validated alignment on both sides; further facilitated by families’ involvement ➢ Management Alignment: Create the third largest bank by assets – USD 70bn ➢ Risks: ✓ Low risk of deal falling through as merger is led by BoD/ shareholders ✓ Low interloper risk as merger pushed by BoD and major shareholders ✓ Regulatory Risk: SAMA pushing for consolidation
- 14. Merger Arbitrage in MENA Short 0.48 SABB Shares – Buy 1 ALAWWAL share Spread is 4%+ in the month prior to merger completion Spread % (1) ALAWWAL trading at a discount Spread hovered around: - 25% after binding agreement 8 months till expected closing - 10%-13% after regulatory and even AGM approvals, 2-3 months before closing - 4% , 2 weeks before closing ! 1. Spread: The difference between the theoretical price of ALAWWAL divided by its current price on Tadawul 0% 5% 10% 15% 20% 25% 30% Offer: Exchange ratio announced Completion AGM Approvals & Deal Completion date announced Binding Agreement signed Regulatory Approvals Spread averaged 7% from Binding Agreement to Closing
- 15. 15 Our Trade is…
- 16. 16 Merger Arbitrage in MENA: Short KFH – Buy AUB ➢ Merger Background ✓ Country: Kuwait ✓ Parties: Kuwait Finance House (One of the largest Islamic banks in MENA) & Ahli United Bank (Regional bank based in Bahrain with significant business in Kuwait and listed in both countries) ➢ Merger Mechanics ✓ Exchange ratio: One AUB share would be exchanged for 0.4300 shares of KFH ✓ KFH Shareholders would own c.65% of the post-merger entity ➢ Rationale for transaction ✓ Increase Presence in Kuwait: 33% of AUB assets are in Kuwait ✓ Geographical complementarity: AUB has presence in geographies that are of interest to KFH ✓ Shareholder (SWF) return targets: Inability to increase ROE organically ▪ Dilutive if done organically or locally due to existing competing Islamic banks
- 17. 17 Merger Arbitrage in MENA: Short KFH – Buy AUB Check List: ➢ Regulator Approval: Validated regulatory alignment and approval ➢ Cross shareholding: Ensured better alignment and higher likelihood for merger with various Stakeholders ➢ Risks ✓ Merger falling through as a result of failure to secure remaining regulatory approvals (many countries regulators required) ✓ Low interloper risk as merger pushed by BoD and major shareholders ➢ Risk Mitigants ✓ If merger falls through, ACP is happy to hold AUB as it is fundamentally more attractive than KFH ✓ AUB trades at P/B of 2.0x generating ROE of 19% vs KFH trading at P/B 2.5x generating ROE of 12%
- 18. 18 Merger Arbitrage in MENA Short 0.43 KFH Shares – Buy 1 AUB Share Proposal & DD Initiation Kuwait CB Approval Exchange ratio announced DD Completion Completion Expected in H1 2020 0% 5% 10% 15% 20% 25% 30% 35% 40% At the Exchange Ratio confirmation date, Spread was c.13%. If we leverage this return 2x at 4% cost of borrow (assumed a worst case scenario of a one year to close), net return would be c.30% Spread % (1) AUB trading at a discount Exchange Ratio confirmed post DD Where we are now (10% spread) Spread was: - 35% at announcement - 20%- 30% after announcement of exchange ratio - 15%-20 % after DD completion and confirmation of exchange ratio - 10% After Regulatory Approval (Kuwait, main central bank involved) 1. Spread: The difference between the theoretical price of AUB divided by its current listed price Bahrain CB Approval
- 19. 19 THANK YOUIF YOU ARE INTERESTED IN THE TRADE PLEASE REACH OUT