Description
Investment highlights
1) Quasi “demutualization” – co-operative bank being run like a for profit commercial enterprise
2) Great management team with a track record for having created shareholder value through a similar transaction before. High equity incentive
3) Good business- 3rd largest retail network in Italy. Good business opportunities due to high (though declining) margins and under penetration of banking products
4) Cheap- Backing out excess capital and value in the subsidiaries, you own it at 9x 2008 earnings with earnings growing 35% in the next two years. Add to that a 50% payout ratio, translating to a 4-5% dividend yield.
BPVN is a “popolare” bank in Italy. Popolare banks were established to provide "socially responsible" banking services on a regional basis. Though most of them were converted into public companies, they unique feature in that one shareholder get one vote, rather than one share getting one vote. Hence, it has been impossible for fully for-profit banks to acquire them, and since employees own shares, efficiency levels have been extremely low.
BPVN (or BPV, as it was then), suffered from the same systemic malaise unitl 2002. That is when Fabio Innocenzi took over as CEO. He doubled the size of the bank through the acquisition of BPN, realigned productivity, cut costs, and floated Italease, which is now a 5bn euro company. The stock went from 12 in 2003 to 22 in 2006 as earnings growth accelerated and efficiency ratio improved
In 2006, BPVN announced the acquisition of BPI. BPI had been through its own set of troubles related to management scandals, bad capital management, no systems development, very low branch productivity and a bloated corporate overhead.
Essentially, this is a quasi demutualization of BPI -it is a co-operative bank being transformed into a for profit entity, under the leadership of a management team that has delivered a similar turnaround before.
Drivers of value creation here include-
- Cost synergies identified are €225mm. That represents 8% of combined costs and compares to the 12% that they delivered in the previous merger
- Revenue synergies of €273mm- to be realized through productivity realignment. BPI has a great footprint and deposit market share, but has a woeful track record in selling banking products though its branches. Utilizing, BPVN's IT systems and cross selling methodology, they can significantly improve their revenue per employee/ branch
- Management has included a 20% buffers in their guidance of €2.85 EPS in 2010
- Capital management- Management has identified up to €3.1bn of excess capital buffer, which equates to more than 3 euro per share of value. The impact of this is not included in management's business plan guidance of €2.85 of EPS in 2010
- Value in subsidiaries - The combined group is going to be the 3rd largest Italian banking network. Much like Banca Italease, they can float their product factories in consumer credit, bancassurance and asset management. This could unlock 3-5 euros per share of value over the next 2-3 years
Catalyst
Catalyst- Closing of the merger in June 2007, implementation of the cost synergies in 2H 2007, listing of Ducato (consumer credit arm) in 1H 2008, structuring of the bancassurance agreement in 2H 2007