Message from Elliott to Fellow Shareholders of the Bank of East Asia, Limited www.fairdealforbea.com
Elliott today published a new open letter to shareholders in response to the recent defence letter from the BEA Chairman and CEO. Elliott calls on the BEA board to allow the market to freely assess the real value of BEA, by immediately:
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- releasing BEA’s two largest shareholders from all remaining contractual restrictions operated by the BEA board, which prevent either of those shareholders from freely selling or buying BEA shares; and
- beginning an auction process for BEA since there is no real prospect of BEA’s current executive management team generating proper shareholder value by continuing to run the business.
- Contrary to the CEO’s comments, Elliott has in fact been invested in BEA for over 5 years – whilst the Bank’s platform is unique, it suffers from long-term and ongoing mismanagement. The 2015 results speak for themselves.
- Capital mismanagement at BEA over recent years is indicated by a high density of risk-weighted assets and the board’s persistent unwillingness to dispose of non-core, capital punitive assets. If BEA had managed its capital more efficiently, BEA’s CET1 capital ratio could today be 390bps higher.
- The unnecessary series of dilutive share placements to the so-called “strategic shareholders” (CaixaBank and SMBC) have not resulted in any observable or measurable benefits and, together with the associated control-related standstill arrangements, demonstrate that the BEA board’s professed commitments to maximizing shareholder value and good corporate governance are merely hollow words.
- To add insult to injury, these share placements have contributed to a situation in which BEA’s independent shareholders have been diluted by 23% since 1997, while the CEO has (principally through option awards) enjoyed a 5% increase in his ownership interest in the Bank over the same period.
- Incredibly, even though (per its own board) BEA “enjoys a sound capital position”, recent media coverage suggests that the board is actively exploring yet another “strategic” share placement, this time to a state-owned Chinese bank. Any new equity issuance should be on a fully pre-emptive basis by way of a rights issue, so that the board’s general mandate is not abused.
- Current market conditions are not a bar to achieving good value for shareholders through a sale of the Bank. For example (i) even in weakening market conditions at the start of the 2008 global financial crisis, the sale of Wing Lung Bank was announced at a price of 2.91x its book value; and (ii) the sale of Nanyang Commercial Bank was announced just over two months ago when the Hang Seng Index was around 10% higher than now, at a price of 1.88x its book value.
- There is continued strong strategic interest in Hong Kong banks and Elliott believes that a responsible board should be open-minded about exploring the real value of BEA. Most other takeovers of family-run Hong Kong listed banks in recent years were priced at a range of 1.77x – 2.35x book value - the BEA board has not indicated that this price range would be inappropriate for BEA.
Elliott said, “BEA has been mismanaged for 20 years – enough is enough for the independent shareholders. We call on the board of BEA to release CaixaBank and SMBC from all remaining contractual restrictions as regards their shareholdings in BEA and begin an auction process to explore the scope for a sale of the Bank at an appropriate premium.”
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