National Bank of Greece (NBG) announced on October 5 late in the evening a voluntary share exchange offer to acquire 100% of Eurobank. NBG offers 58 new shares for every 100 Eurobank shares implying a premium of 7.0% and 3.6% on October 4 and 5 closing prices respectively. Note that the deal had been rumoured earlier on the same day, the two stocks traded for just 1 hour and then their trading was suspended. The proposed share exchange offer corresponds to a 75% – 25% participation of NBG and Eurobank current shareholders in the new entity.

What is more important is that Eurobank shareholders representing 43.6% of its share capital (i.e. Latsis family) have committed to tender their shares in the tender offer, meaning that NBG offer will be successful regardless of the participation of the remaining Eurobank shareholders in the tender offer. NBG has also called an EGM on October 30 to approve the tender offer, which is also subject to regulatory approvals, while intends to absorb Eurobank after the completion of the offer.

It is noteworthy that Eurobank had announced on July 23 that EFG Group (fully controlled by the Latsis family), which held 44.7% of Eurobank shares (at that time), in order to satisfy regulatory authorities transferred 43.55% to nine younger members of the Latsis family and to the John S. Latsis Public Benefit Foundation, each of whom would hold c4.4% of Eurobank shares, while EFG Group would retain 1.15%. As we had commented on that development, the new shareholder structure would facilitate a potential merger of Eurobank with another bank and the participation of the former major shareholder in the share structure of the new entity. Note that Eurobank’s AGM held on June 29, decided to amend the corporate (previously ‘EFG Eurobank Ergasias’) and brand name (previously ‘Eurobank EFG’) removing ‘EFG’, which referred to the major shareholder, from both names.

Following NBG announcement, Eurobank CEO issued a statement noting that “Eurobank BoD will further evaluate, in a constructive spirit, the merits of the business combination in the interest of all stakeholders, including employees, customers, shareholders and the Greek economy”.

Based on pro-forma Q1’12 figures, the combined NBG-Eurobank entity would have total assets of €177.7bn, deposits of €87.9bn and net loans of €109.7bn, becoming by far the largest Greek banking group with key BS items more than double compared to those of the second bank. Furthermore, the new entity’s loan-to-deposit ratio would stand at 122.6% (standalone – NBG: 111.1%, Eurobank 143.6%), Eurosystem funding at €63bn (equally split between the two banks), accumulated provisions at €12.1bn (10% of loans) and NPL ratio at 15.3% (standalone – NBG: 14%, Eurobank 17.2%). EBA core Tier I ratio of the new entity, including the combined €11.4bn received by HFSF as capital advance in the form of EFSF bonds in May, would reach 8.5%. The combined group would have the largest branch network in Greece consisting of 925 branches, while the two banks’ presence in the SEE is complementary. NBG said that it estimates the new entity will achieve annual pre-tax synergies of €570-630m by the end of 2015, without providing any further details, while one should also take into account the – yet undisclosed – (one-off) merger and integration costs.

The story of a Greek bank mega deal had been initiated in October 2001, when the top management of National Bank and Alpha Bank announced their intention for a friendly merger to form a national champion. It is worth reminding Alpha Bank Chairman’s statement on the day of the merger announcement: “What we could not achieve on our own, we can achieve it together”. Nevertheless, despite top management commitment, both banks decided to discontinue the merger process in January 2002, due to disagreement on the organisational structure, responsibilities’ assignment, mistrust and different corporate culture between the employees of the two banks.

After almost 9 years, NBG disclosed in February 2011 a friendly merger proposal to Alpha Bank, which was immediately rejected by Alpha Bank’s BoD citing “the uncertainties of the current environment and the terms of the proposal itself”. A few months later, at the end of August 2011, mainly due to the government’s intention to provide capital support to Greek banks only in the form of common shares, the BoDs of Alpha Bank and Eurobank announced a merger agreement along with a €3.9bn capital strengthening plan. Among others, the deal approval by the Latsis family had actually signalled its definitive decision to adopt an exit strategy from Eurobank. Although the merger was approved by the EGMs, Alpha Bank raised doubts about the merger at the end of January 2012, following troika’s proposal to allow bank recapitalisation to be carried out through the issue of non-voting instruments. Alpha Bank also raised the issue of higher capital requirements of the new entity due to higher-than-initially anticipated haircut on GGBs (PSI). Through a later announcement in mid March, Alpha Bank officially revoked the merger agreement.

Unlike the previous unsuccessful efforts for a Greek bank mega deal, there are a number of key differences that can be identified in the announced NBG offer:

• It is not a proposal for a friendly merger initiated by the top management of the two banks, but a voluntary offer by the BoD of NBG to Eurobank’s shareholders. In that sense, it is typically a hostile takeover rather than a friendly approach as it was in the previous instances.

• Shareholders controlling 43.6% of Eurobank’s shares have already committed to tender their shares in the tender offer. Thus, we can consider this is a done deal, unlike the previous cases where the management or the BoD of a bank – and not its shareholders – withdrew from the merger process.

• Based on the type and the content of the tender offer, we can conclude that NBG has clearly the upper hand in the acquisition-merger process, since the Chairman and the CEO of NBG will retain their posts in the new entity, Eurobank brand name will gradually disappear, while there is no disclosed commitment regarding the future of Eurobank top management in the new group.

On the contrary, a key similarity to all announced Greek bank merger proposals is that top management or major shareholders agree on mergers or acquisitions only in distressed situations as a last resort of an exit strategy and/or to overcome the significant weaknesses their bank is facing.

M&A in the Greek banking market, particularly involving a merger among the top-4 banks, was one of the most hot stories over the past 10 years. Many reports, rumors and speculation had dominated local media regarding all potential banking couples, except one: NBG merging with Eurobank. One of the reasons was that the government would not approve Eurobank’s major shareholder (Latsis family) becoming the largest shareholder of the new entity. The recent change in Eurobank shareholder structure facilitated the deal with NBG.

Another reason, which could be also perceived as a challenge for NBG top management, was the different culture of the two banks particularly regarding the branch operations, employees’ motivation, product offering and marketing strategy as well as the different clientele: Eurobank mainly focused on middle-to-upper class providing innovative products using state of the art technology through a customer-centric approach, while NBG’s clientele involved pensioners and low to mid-class income clients offering traditional commercial products under its strong brand name through its extended branch network all over Greece. Most competitors criticised Eurobank aggressive policy, particularly in the consumer credit sector in the high growth years, while NBG clients – or potential clients – are often complaining for delays for completing just a simple cash transaction, due to the large queues in front of its cashiers. It is noteworthy that Eurobank was one of the most successful cases in the Greek banking market, starting as a small bank under the brand name Euromerchant Bank at the end of 1990 and following acquisitions and organic growth became the second largest Greek banking group with presence in Bulgaria, Romania, Serbia, Poland, Turkey, Ukraine and Cyprus.

The previous important M&A activity in the Greek banking market had taken place in 1999, when Alpha Bank acquired ex-Ionian Bank and Eurobank took control of ex-Ergobank. After 13 years, dominated by high domestic organic growth and expansion abroad during 2004-08, the domestic banking landscape has completely restructured over the past two months heralding a new era for the Greek banking market: The first move was the acquisition of the sound part of ATEbank by Piraeus Bank in late July, followed by the upcoming completion of the acquisition of Emporiki Bank (fully owned by Credit Agricole) by Alpha Bank and then by the announced mega deal with NBG acquiring Eurobank. Further developments involve the upcoming potential acquisition of Geniki Bank (fully owned by Societe Generale) by Piraeus Bank, with the two banks announcing they have entered into exclusive negotiations, and the potential disposal of the State’s stake (44%) in Hellenic Postbank.

Rumors as well as official announcements on M&A over the past 2-3 months had overshadowed the most important issue for the viability of Greek banks: the clarification of bank recapitalisation terms and the implementation of the recap process. The latter have been delayed due to the ongoing discussions of Greek government authorities with the troika on austerity measures of €13.5bn, a process which has consequently delayed the disbursement of the next tranche of €31.5bn, the bulk of which involves bank recap.