In the news this morning the Thai newspaper Kao Hoon reported on rumours that Siam Commercial Bank (SCB) is in talks with the Ministry of Finance (MOF) to buy its 26% stake in TMB through a share swap ratio of one SCB share to 60 TMB shares. 

The key issue with this transaction lies with the valuation and the fact that the MOF will not sell below P/BV 2x as it would then have to recognise a loss on the investment in TMB.

If SCB were to purchase TMB then the mathematics would be as follows:

• SCB would have to issue approx 190mn new shares at around THB 140/share to swap for 11,300 mn TMB shares held by the MOF at about THB 2.4 / share.
• Following on from this, under SEC rules, SCB would then have to launch a tender for the remaining shares in TMB held by other parties, which includes ING’s 25% stake. If SCB were to issue further shares to cover this transaction at the same valuation, it would result in current shareholders being diluted by about 20%.

So why would this transaction make sense if:

• SCB is already the most profitable bank in Thailand
• Has strong NPL ratios (2.85%) versus TMB’s (7%)
• This transaction is expensive, it would weaken SCB’s balance sheet, ok it may improve its Assets under management statistics, but then shareholders are diluted by 20%. A turnaround play perhaps? I highly doubt it, ING has been trying to do this for years and turnarounds can take a far longer time to play out.

• If you want to play this news, your brokers are probably saying short SCB long TMB, I digress, that rarely works in the Thai market, if you look back the trend is normally just simply long both counters.
• We’ve traded TMB in the past based on speculative news and looking back consider ourselves to have been lucky to make a profit. We won’t be trading on this news at all.
• Oh and a quick note: The MOF holds a 23% in SCB through the Vayupak Fund – Conspiracy Theories begin now…