- A. Key terms of the Merger
The exchange ratio proposed is c. 15.8 new Eurobank ordinary shares for every 1 Grivalia ordinary share, while Eurobank shareholders will retain the number of Eurobank ordinary shares they currently hold (the “Exchange Ratio”). Prior to completion of the Merger, Grivalia will proceed with (i) a distribution of approx. €40.5m (€0.42 per Grivalia share ) to its shareholders via a share capital reduction (the “Pre-Transaction Distribution”) and (ii) a distribution of €13.7m to its employees and BoD members, representing accrued bonus payments and BoD fees for 2018, deferred bonuses from previous years as well as partial vesting of the long term incentive plan.The Merger will result in a pro forma ownership split of the enlarged share capital of c. 59% owned by existing Eurobank shareholders and c. 41% by existing Grivalia shareholders . The Exchange Ratio plus the Pre-Transaction Distribution represent a premium of 9% over the share price of Grivalia, based on the closing prices as of Friday, 23 November 2018.The Exchange Ratio is subject to (i) the Boards of Eurobank and Grivalia and (ii) Hellenic Financial Stability Fund (“HFSF”), all three entities, receiving fairness opinions from international investment banks. The completion of the Merger is subject to (i) no event, fact, occurrence or change having (or reasonably expected to have) a material adverse effect on the business, financial condition or liabilities of either Eurobank or Grivalia (which would include any potentially significant unfavorable financial, legal or administrative outcomes) and (ii) obtaining all necessary approvals from the General Meetings (“GM”) of the two companies, the HFSF and relevant regulatory authorities.The date of the Merger balance sheet will be 31 December 2018. Fairfax Financial Holdings Limited (“FFH”), which currently holds 18.23% and 51.43% in Eurobank and Grivalia, respectively, will become the largest shareholder in the merged entity with a 32.93% shareholding.Subject to the relevant legal and regulatory requirements and Eurobank’s corporate governance procedures, upon the completion of the Merger, Mr. George Chryssikos, currently non-executive director of Eurobank, will be proposed for non-executive Vice Chairman of the BoD of Eurobank and will join the Strategic Planning Committee. Mr. Nikolaos Bertsos, currently Chairman of the BoD of Grivalia, will be proposed for a non-executive member of the BoD of Eurobank.
B. Transaction key points
- Based on annualized 9-month results for Eurobank and Grivalia, the new group after the merger (“New Group”), on a combined pro-forma basis, will have operating income of €1.9bn (€0.52 per share) and pre-provision income of €1bn (€0.28 per share). Furthermore, it will have a diversified revenue base, as c. 30% of its operating income will be generated from international operations and real estate activities.
- After the completion of the Merger, the New Group will have a total capital ratio of 19.0%, the highest in the Greek market, a phased-in CET1 ratio of 16.6% and a fully loaded CET1 ratio of 13.8% (pro forma based on September 2018 figures).
- The leading capital position of the New Group will enable the acceleration of its NPE reduction plan (the “Acceleration Plan”) compared to the current 3-year NPE reduction plan (2019-2021) which is targeting a Group NPE ratio of c. 15% by the end of 2021.
- Furthermore, the New Group will be able:
- to focus on its core business of financing the economic growth in the countries where it has strategic presence, taking advantage of future credit growth prospects both in Greece and abroad;
- to explore consolidation opportunities in Southeastern Europe – Eurobank has already taken a significant step in this direction with the announced agreement to acquire Piraeus Bank’s Bulgarian subsidiary, which will result in Eurobank Bulgaria becoming the 3rd largest bank in the country;
- to demonstrate excellence in dedicated management of real estate assets and to accelerate the unlocking of hidden value; and
- to pursue further operating efficiency and proceed with further simplification and digitalization of the bank.
The Merger combined with the implementation of the Acceleration Plan will yield significant benefits for the New Group and its shareholders:
- Target an NPE ratio of c. 15% by the end of 2019 and pave the way for a single digit ratio by the end of the plan period (2021);
- Significant balance sheet de-risking following the de-recognition of a significant part of deeply delinquent, denounced NPEs, retaining those that have better curing and recovery potential; and
- Target RoTE in excess of 10% in 2020, based on a fully loaded CET1 ratio in excess of 12%.
C. Acceleration Plan
The New Group will proceed with the execution in 2019 of its already announced 3-year NPE reduction plan. Furthermore, the New Group will initiate the following plan:
- Securitization of deep delinquency NPEs of gross book value c. €7bn (“Securitized NPEs”) according to L. 3156/2003 via their transfer to a special purpose vehicle (“SPV”) and the issuance of senior, mezzanine and junior notes, initially to be fully retained by the New Group.
- Hive-down all existing assets and liabilities of the New Group, including DTC and excluding the SPV shares, the mezzanine and the junior notes, into a new banking subsidiary (“New” Eurobank).
- De-recognition of the Securitized NPEs through the distribution to shareholders, or the disposal to third party investors, or any combination thereof of the SPV’s mezzanine/junior notes. The structure of the transaction ensures that the New Group shareholders will not be diluted as DTC conversion will not be triggered and, depending on the option chosen, it will provide them with the benefit of any upside on the Securitised NPEs.
- In this context, “New” Eurobank may also contemplate the entry into the capital of Financial Planning Services S.A. (“FPS”), the licensed 100% owned loan servicer of “New” Eurobank, of a strategic investor, which may acquire a significant stake. The SPV will enter into a service level agreement (“SLA”) with FPS for the professional servicing of its loans and the maximization of the value for all its noteholders. Furthermore, “New” Eurobank will also enter into a SLA with FPS for the professional servicing of its remaining on balance sheet NPEs.
The Acceleration Plan has been presented to the Single Supervisory Mechanism (“SSM”) and Bank of Greece and is subject to the approvals of the GM and the relevant regulatory authorities. It is estimated that key approvals may be received by mid-2019 and the plan may be executed by the end of 2019.
D. Real estate management company
After the combination of Grivalia’s real estate portfolio and Eurobank’s own-use, investment property and repossessed real estate assets, the New Group will have a real estate portfolio of €2.2bn, pro-forma as of 30 September 2018. The New Group will enter into a 10-year SLA for the management of all its real estate assets with a new company (“Grivalia Management Company”), which will be established prior to the completion of the Merger by key members of Grivalia’s management team and will employ the personnel of Grivalia. Mr. Chryssikos will be the Executive Chairman and one of the key founding partners of Grivalia Management Company with a stake of 70%. The SLA will be proposed for approval to the GM of both Eurobank and Grivalia, as a related party transaction, along with the Merger terms, and become effective upon completion of the Merger.For the management of the real estate portfolio, Grivalia Management Company will charge market level fees based on cost and performance criteria. Based on the current real estate holdings of the New Group, the net incremental cost expected to be incurred by the combined New Group will be c. €3.5m (before VAT) per annum. The fees paid by the New Group to Grivalia Management Company will be subject to a cap of €12m (before VAT) per annum.
E. HFSF matters
Both before and after the Merger and the Acceleration Plan, the rights of the HFSF, according to Law 3864/2010, as in force, and the Relationship Framework Agreement as well as the public interest will be fully protected as will be evidenced in the hive-down deed. Furthermore, prior to the Merger, an agreement shall be entered into between the Bank and the HFSF (“HFSF Agreement”) according to which after the hive-down the obligations of the Bank vis-à-vis the HFSF and the rights of the HFSF under the Law 3864/2010 shall apply both in relation to the existing legal entity of the Bank and New Eurobank. Both the Merger and the Acceleration Plan are subject to approval by the Bank’s General Meetings, the SSM and all other relevant regulatory authorities.