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Liquor, banking never mixed well for tycoon

 

Thanong Khanthong and Anoma Srisukkasem look at the distiller who let go of his bank.

The attempt by Citibank NA to take over First Bangkok City Bank (FBCB) might create the impression that liquor tycoon Charoen Sirivadhanabhakdi is heading towards financial oblivion.

Adding to the perception is the fact that he has already lost First Bangkok City Finance & Securities Co Ltd, which was recently closed along with 55 other finance companies.

But Charoen, who is certainly better at distilling liquor than managing a bank, has never professed to be a banker. His 30 per cent holding in Bangkok Metropolitan Bank (BMB) is even larger than the stake held by the Tejaphaibul family, which has been managing BMB all along.

The trouble is the Tejaphaibuls have never been able to turn BMB into a healthy bank, in good times or bad, because its resources have been channelled into supporting their shaky businesses.

Both BMB and Siam City Bank (SCIB) have been identified as troubled banks badly in need of massive recapitalisation before their rotten financial books erode public confidence and do more harm to Thailand's financial system.

SCIB suffered a serious setback after ING Bank of the Netherlands put its plans to acquire a 10 per cent stake on hold after the bank failed to raise fresh capital from the domestic market. SCIB's main problem is that it has no core shareholder group that wants to stick around. Everybody is abandoning this sinking ship.

Charoen is not the kind of man to bash his head against the wall. His holding in FBCB, which largely supports his business empire, is estimated at about 35 per cent, equivalent to 350 million shares of the outstanding one billion shares.

By giving up his control in FBCB to Citibank, Charoen hopes to salvage the value of his FBCB stake, which has a present market value of Bt2.69 billion. At the present share value of Bt7.70 apiece, FBCB's market capitalisation is about Bt7.7 billion.

Citibank, a global giant, has a solid name. If all FBCB's 100 branches or so carried the Citibank logo, confidence should quickly return to the Thai bank.

Citibank's strategy is to focus its foreign branch on wholesale banking and develop FBCB's retail network to support its retail banking. The US bank, which has attempted in vain to break into the local banking industry in the past, realises that the quickest way to create a network of 100 branches is to buy into an existing bank rather than build the network from scratch.

It now seems set to fulfil its aspiration following the liberalisation of the local banking system, which needs to be revived almost solely with foreign capital.

Charoen will not sell his 35 per cent stake in FBCB. Citibank will buy about 50 per cent of the bank by subscribing to new share capital, hence diluting the stakes of existing FBCB shareholders, including Charoen's.

Depending on the outcome of the due diligence, expected to be completed some time in February, and the level of its non-performing loans, FBCB's recapitalisation will result in a capital adequacy ratio of 12 per cent.

If FBCB's capital is doubled, Charoen's holding will be diluted to 17.5 per cent. If the capital is tripled, his holding will shrink to about 10 per cent. But the value of his stocks is not expected to shrink along with the ratio of his holding if Citibank can reorganise the Thai bank and set it back on the path to profitability.

Foreign investment in the Thai banking system is inevitable as archaic rules have recently been relaxed to allow foreign investors to hold 100 per cent of local banks for at least 10 years.

Price negotiations have proven to be tough. Again, it depends on the outcome of the due diligence. Citibank has already brought in about 200 staff members to take a hard look at all aspects of the local bank. Merrill Lynch and Cooper Lybrands are jockeying to advise Citibank on this deal, while FBCB has hired Salomon Brothers as its financial adviser.

One financial source indicated that Citibank -- being American -- would like to buy the Thai bank at what it considers a ''merit-making'' price of Bt1 a share, while FBCB is bargaining for a premium on the value of its stocks.

Over the weekend, it was reported that key FBCB management had been removed on ''guidance'' from the Bank of Thailand. The banking authorities are sharpening their swords, issuing a stern order for Thai banks to raise capital, seek foreign partners and strengthen their management or directors.

They are keen to play up the deal struck by Thai Danu Bank, which is to be acquired by the Development Bank of Singapore for Bt6 billion, and the FBCB deal. Both deals have helped quell rumours about the troubles of BMB and SCIB.

One of the reasons the authorities have recommended a management change at FBCB is that the bank has borrowed more than the amount of its shareholders' equity from the Financial Institutions Development Fund.

As of October, its outstanding deposits reached Bt141.16 billion, down 11.2 per cent from January. At the same time, its short-term borrowings in the interbank system hit Bt123.89 billion, up Bt135.2 per cent from January.

''The management change will be beneficial to the bank. And we support this move because it will bolster confidence,'' Bank of Thailand Governor Chaiyawat Wibulswasdi said.

He said if the management change is delayed until February when the due diligence is expected to be finished it might be too late.

''Any banks moving to change management show they have a commitment to resolve their problems,'' Chaiyawat said.

For Charoen, this is the time to salvage his core business and let go of inefficient investments. If he is known as the best liquor distiller, why doesn't he prove so?

 

 

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