OCBC suspended trading on Monday after announcing its plans to bid for Wing Hang Bank. Yesterday, the local bank resumed trading and ended 1.2% lower day on day. Macquarie Equities Research (MER) released a research note on Monday stating their views on the attempted acquisition. MER has a 12-month price target of $10.40 and a ‘Neutral’ rating on the bank. Some excerpts are shown below.

Event
OCBC Group and Wing Hang Bank have both announced that they have entered into an exclusivity agreement until January 31 to attempt to formalize an acquisition by OCBC of Wing Hang via a general offer.
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Impact
Specifically, the exclusivity agreement was entered into on December 31, with the counterparties being OCBC and the major shareholders of Wing Hang -- the Fung family and BNY.
 
This announcement does not constitute a binding agreement on an acquisition.
 
There is no mention of pricing in the announcement.
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MER’s action and recommendation
It is hard to come to any conclusions in light of the limited disclosures, but MER’s initial thoughts are that it may be difficult to reach an accord on pricing. Wing Hang is a 9-10% return on equities (ROE) business, implying that any significant premium over book value would be difficult to justify on economic grounds even factoring in a control premium. MER’s sense is that OCBC may be constrained by shareholders from offering an irrationally high price although given the history of Singapore banks in Hong Kong, MER admits there is risk in coming to any such conclusions at this point.
 
Wing Hang's shareholders are likely to be mindful of recent comps and demand at least a valuation as high as Chong Hing's 2.3x price to book value (P/BV) -- and very likely even higher given Wing Hang's larger overall banking footprint.
 
Bloomberg, citing un-named sources, has reported that a Chinese insurer valued the company at a maximum 1.7x P/BV. However, MER reckons that the family is likely to hold out for 2.3x P/BV at a minimum, and more likely a price valuation that is north of 2.5x P/BV.
 
Such a high valuation would be significantly value destructive for OCBC's shareholders, in MER’s view, and MER would be cautious on the stock pending further clarity.

Source: Macquarie Research - 8 Jan 2014