Brian Joffe's acquisition leviathan, Bidvest, has launched an unsolicited bid for the Portuguese banking proxy, Mercantile Bank. Bidvest's offer comes in at 35,5cps, versus Mercantile's closing price of 25cps yesterday.

This values Mercantile Bank at a market cap of R1,3bn against its current market cap of R0,9bn.

Mercantile Bank is 92% held by the Portuguese bank, Caixa Geral de Depõsitos SA, thus this bid by Bidvest is basically entirely resting on the majority shareholder's vote in favour of it. There are the usual suspensive conditions and approvals that need to be gained, but as Mercantile is a bank, this list has a couple additional names like the SARB. Thus, even if the votes are received in favour of the acquisition by Caixa, the various approvals could add months to the wait for finalisation.

There are a couple interesting facts around this acquisition that I would like to go into:

Firstly, Mercantile has actually been quite a badly performing bank over the last couple of years. The last time its share price touched anywhere near the 35,5cps price tag that Bidvest placed on it was back in early 2009. The Bank's ROE has fairly average 19% over the last three years, but has recently been as low as 6.7% in FY 10. FY 10's low ROE compares against, for example, Standard Bank's FY 10 ROE of 13.4% and ABSA's FY 10 ROE of 15.2%. It did not help Mercantile's cause that the bank's FY 1-0 results showed such a decline in profits and it is more than likely (with increasing banking competition and the threat of coming interest rate hikes by SARB) that this position will not change in the short-term.

Secondly, Mercantile was recently subject to a potential merger with Sasfin Bank. Sasfin is a small bank targeting the higher net worth individuals and entrepreneurial crowd in South Africa. I have always been fairly impressed with the people I have met from Sasfin, as they seem to run quite a tight operation. Sasfin's FY 10 ROE came in at 14.3%.

This merger would have an intriguing appeal, as both banks target different market segment (Mercantile has, through its legacy parent, strong ties into the South African Portuguese community and various other transactional banking services) and could cross sell themselves into each others clientèle. That said, all the synergies and paper logic are pointless to discuss, as these merger talks fell through.

What this says to me, though, is that Caixa Geral de Depõsitos SA is getting frustrated with their South African asset and are keen to kick start its growth or sell it. Bidvest may well be playing into this attitude with their opportunistic bid, thus I feel inclined to think that Caixa Geral de Depõsitos SA will vote in favour of the fairly generously priced offer.

Finally, why is there no SENS from Bidvest? Well, the R1,3bn offer from Bidvest is less than 5% of its market cap. My understanding of JSE regulation is that a company need only think about disclosing an acquisition if it is greater than 5% of its market cap. There are also various other levels where the company must disclose the acquisition. So, do not expect much formal commentary from Bidvest as to their intentions for the acquisition of a bank.

Let me hazard a guess as to Bidvest's reasons for wanting a bank...

A couple years ago Bidvest actually did own a bank, but they sold this to Grindrod. The bank has subsequently been renamed "Grindrod Bank" and is ticking along in the latter's group. Correction: Bidvest still owns that bank and has renamed it "Bidvest Bank". So, perhaps there are some synergies in sticking Mercantile and Bidvest Bank together?

Bidvests conglomerate machinery is actually fairly geared. The group has a D:E of c.0.6. This gearing involves a lot of debt and costs a lot of interest expense to maintain. But, if there were a 100% held bank in the group's stable, then suddenly the group could tap the bank's access to cheap credit (and in Mercantile's case, they actually have a lot of spare cash on their balance sheet) and cash and loan in into the group at very favourable rates. This ensures that Bidvest's debt is cheaper, its interest cover expands, and its profit increase.

And, on top of that advantage, Bidvest then owns a bank and can gain access to growth in that market.

Perhaps there are other reasons more astute market commentators could point out, but these are my thought on Bidvest's intentions and Caixa Geral de Depõsitos SA's attitude.

So do I think that the Mercantile minority shareholders should accept the bid?

Yes. I believe that 35,5cps is a fairly generously priced control premium and the cash gained by cashing out at that price could well be invested into other assets yielding better forward returns than Mercantile has over the last couple of years.

I think that the market will jump the MTL share price up to around 30c to 32c, leaving about 15% to 20% still on the table for acquisition arbitrage given the risks of concluding the deal and potential length before the deal is finally concluded. And the future from there is anyone's guess.

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