SABB-Alawwal merger to set precedent for more M&As: Riyad Capital

The successful merger of the Saudi British Bank (SABB) and Alawwal Bank would represent a "milestone" for the Saudi market and act as a precedent for others particularly in sectors such as cement and petrochemicals as there are many opportunities for synergies, Riyad Capital said in a recent report.

"This merger would lead to a bigger and stronger combined entity with SABB (and HSBC) benefitting from becoming the third largest bank in the country at a time when other foreign banks are trying to establish a presence in the Kingdom," the consultancy noted.

"There would definitely be synergies across business lines leading to a reduction in costs although both banks have announced that there will be no redundancies; most likely departing employees may not be replaced," it added.

Last week, Alawwal Bank and SABB announced that talks of proposed merger were at an advanced stage, and a preliminary share exchange ratio had been agreed.

HSBC Holdings has a 40 percent stake in SABB while Royal Bank of Scotland owns 40 percent of Alawwal via its acquisition of ABN AMRO. Olayan Group is the common shareholder in both banks with 16.95 percent stake in SABB and 21.73 percent in Alawwal as per Tadawul.

According to the report, the merger could also make it easier for RBS to exit from the merged entity as it would be selling a minority stake.

"We believe there could be many interested parties for a minority (but substantial) stake in SABB-Alawwal," it added.

According to the announcement, SABB will issue 0.485 shares for 1.00 Alawwal share. At a price of SAR 33.5/share for SABB on May 14th, this works out to a price of SAR 16.3/share for Alawwal, 29% above the May 14th price

"We expect the stock price of the two banks will converge towards this share exchange ratio i.e. through a combination of an increase in Alawwal share price and/or a decrease in SABB stock price," Riyad Capital stated.

Post-merger, SABB-Alawwal would become the third largest bank in the country both in terms of deposits and advances.