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Habubank Merger “arbitrage”

The market action today (i.e. 14 Mar 2012) was a little strange to me. Wondering if anyone finds it strange too…

According to news released:

March 13, 2012 (Vietnamica) - VnEconomy - one of the largest economic and business newspaper in Vietnam - on Mar 12, has reported that Saigon Hanoi Bank is fully acquiring Habubank. The State Bank of Vietnam has reportedly agreed on the deal in principle. The two banks has allegedly signed an agreement on swapping 1.34 shares of HBB for 1 share of SHB. The deal is advised by Vietcombank Securities. The acquisition will also bury Habubank brand.

Usually when a merger is announced, the acquiring company's shares drop and the acquired company's share price rises, especially when the transaction is being done in shares…

In this case, the opposite is true. As I have observed, today Saigon Hanoi Bank (SHB)'s shares is flat at 10,400 VND while Habubank (NYSE:HBB)'s shares dropped down limit at 6,100 VND per share on this "news" or rumour. At this kind of price discrepancy, if the deal finally goes through, we can get a share of SHB for just over 8,000 VND per share (compared to the current market price of over 10,000 VND) by owning shares of HBB. This is a good discount of about 20+% from the current market price!

I believe this is the case because there is some doubt as to the transaction going through or not. Habubank indeed issued a press release denying the above-mentioned rumour, saying "it is not true and provides no proof." Meanwhile, adding cryptically that "Habubank welcomes any collaboration."

My take on this matter is that I still think with this acquisition, or possible acquisition, HBB represents a low risk bet. Even if the acquisition fails, other market players will be keen to acquire this bank. Even if one has to tolerate some downside risk, this bank has a long history and while performance in the last 5 years had not been inspiring, the price more than accounts for the risk. This is especially true after the prime minister's promise to buy bad debt from the local banks to stabilize the banking system. The big picture of the Vietnamese banking industry is that it is currently undergoing restructuring and still I believe that, like other countries, letting non-performing banks fail will not be an option and the government will tend to push these banks to merger with each other. HBB is a prime candidate especially since it has lots of loans which turned bad stemming from the collapse of Vinashin. Apparently, HBB is one of the banks which lent heavily to Vinashin.

Disclosure: I have shares of SHB from quite some time back established at a price slightly higher than the current market price, and I will try to buy as many shares as possible of HBB (initiate a new position) tomorrow, 15 Mar 2012. Ideally, I should sell my existing shares of SHB and buy more HBB instead (switch) but since the merger has not be confirmed yet, I guess I will still keep my SHB shares.

Note: Why I put the "arbitrage" in quotes is that one is not able to short sell shares in the Vietnamese market. Theoretically, one can short 1 share SHB for every 1.34 shares of HBB to capture this spread but since we can't short sell here, it is not an arbitrage in the usual sense.