BDO merger with Equitable is top priority - Macquarie

Macquarie Research said the planned merger of Banco de Oro Universal Bank with Equitable PCI Bank should prosper since another failed deal would be detrimental to both banks. "For Equitable, delays would mean confusion over its strategic direction, while for Banco de Oro, it would run the risk of operational distraction, which could derail its recent string of good organic growthm" Macquarie said in a report released on Monday. The investment house released the report following a conference call with Banco de Oro president Nestor Tan. "Management felt that the offer was necessary to get the merger process going, as continued delay would have been detrimental for both banks – with which we agree," Macquarie said. According to Macquarie, Banco de Oro plans to proceed quickly with the merger should the offer be accepted. "It stressed that this could start right after the crossing date of October 2006 and would not have to wait until the offer is fully paid on October 2008," Macquarie said. "While the merger may formally take place in mid-2007 due to shareholder and regulatory approvals, management suggested that integration groundwork could begin even earlier." Cost savings would come from overlaps and duplications, including some 120 branches, head office and technology functions. Revenue benefits would come with size and scale, as the combined entity would rank No. 1 to No. 3 in all major sectors. "A swap ratio to merge BDO and EPCI: BDO plans to effect the merger through a swap ratio on agreeable terms. With management looking at a detailed analysis of the two banks' respective assets, this lends hope that the swap ratio would not be as dilutive as the SM offer would indicate," Macquarie said. "At the SM offer, it would imply a 2.3 times swap ratio. Management thinks the deal would be dilutive in the first two years, with breakeven in the third year." Macquarie reiterated its "outperform" rating on Banco de Oro and target price of P47. "Banco de Oro is our top 'outperform' not only in the banking sector but in the market as well. While the deal will be dilutive to Banco de Oro, we believe this would be outweighed by the strategic transformation the deal would bring to the bank," Macquarie said. "Not only will Banco de Oro become the largest bank in the country, but also liquidity will improve as foreign ownership will be freed up – thus providing a good alternative to sector favourite Bank of the Philippine Islands."