HONG KONG -- Elliott Management, an activist New York hedge fund probably best known for hounding the Argentine government for bond default, has turned up the heat on Bank of East Asia (BEA) and urged the bank to put itself up for sale.
"Shareholders have long suffered from BEA's entrenched executive management, which has mismanaged the business, resulting in weak underlying financial and operating performance and poor returns for independent minority shareholders," said Elliott in a letter to fellow shareholders on Thursday. Elliott is BEA's fourth largest shareholder with a 7% stake.
The letter was sent after BEA announced that CaixaBank, the bank's second largest shareholder, had agreed to transfer its 17.24% stake in BEA to its parent company, Criteria. The deal is bundled with the sale of a 9.01% stake in Grupo Financiero Inbursa for 10% of CaixaBank and a cash payment of 642 million euros.
The transaction, which is set to close by March, nullifies prior agreements that oblige CaixaBank to vote in favor of any resolution proposed by the board of BEA. In effect, CaixaBank can offer its 17% stake freely in any takeover bid for BEA.
Banks in Hong Kong are usually sold at two times book value, and Elliott said that the "appropriate premium" for BEA should be HK$60 per share, or around 185% more than the current share price.
After the letter on Thursday, BEA's shares spiked as much as 13.6% above its four-year low on Feb.3, and closed 5.5% up at HK$23 on Friday.
BEA is one of two remaining family-owned banks in Hong Kong. As more foreign banks seek access to China, independent local banks with established networks and resources have made good strategic merger targets.
For instance, Wing Hang Bank, with 70 branches spanning the greater China region, was taken private by the Singaporean lender Oversea-Chinese Banking Corp. for US$5 billion in 2014. It was the second largest acquisition since OCBC's largest competitor DBS Group Holdings' US$5.4 billion bid for Dao Zheng Bank in 2001.
In 2013, Chong Hing Bank sold a majority stake to Yuexiu Enterprises, a conglomerate from China, for US$1.5 billion.
More recent takeover speculation has been fuelled by small lenders feeling the pinch in China's economic slowdown. In the first six months of 2015, BEA recorded a 6.3% decline in net income as net interest margin narrowed by 23 basis points to 1.95%. The bank's non-interest income also dropped nearly 15%.
Since the summer, various investment banks have downgraded stock ratings for BEA, whose market capitalization has shrunk to $7.39 billion from $9.7billion a year ago. Richard Li, the youngest son of Hong Kong billionaire Li Ka-shing, sold his remaining stakes in the bank in October.
BEA Chairman David Li Kwok-Po has always staunchly defended the family business, which dates back almost a century. In a bid to shore up the board's control, BEA issued 222.6 million new shares to Sumitomo Mitsui Banking Corp last year, which lifted the Japanese bank's holdings to 17.5%.
Elliott regarded the diluting placement with Sumitomo as unfair to minority shareholders, and embarked on a legal wrangle with BEA to have documents disclosed. Jonathan Harris, the presiding high court judge, was not convinced that the placement was justified and found in favor of Elliott.
In the past few months Elliott has aggressively increased its stake in BEA to 7% from 2.5% last August - a move that BEA described as "pushing the bank into play" through diluting the board's ownership.
"Elliott's stance appears very short-term focused and it takes no account of the long-term, sustainable business that the bank is building," said BEA. "We believe their actions towards BEA demonstrate self-interest rather than the best interests of all shareholders."