HSBC Holdings PLC's (LSE:HSBA) proposal to buy the remaining 36.7% minority shareholders in Hang Seng Bank was a bit of a surprise, analysts said, with the price looking a little "punchy".
The second-largest company in the FTSE 100 saw its shares fall over 6% as it said the $13.6 billion cost to own the whole of the Hong Kong lender would be paid for by pausing three quarters of share buybacks to restore its CET1 capital level back to where it was.
Paying HK$155 a share equates to around 15 times forecast earnings, according to analysts at Keefe, Bruyette & Woods, or 1.8 times tangible book value.
The transaction is expected to reduce CET1 by 1.25%, reflecting the cash consideration less 0.40% for the removal of non-controlling regulatory capital deductions from surplus capital in Hang Seng.
"This equates to a net CET1 capital cost of $11 billion, equating to one year of share buybacks," said the KBW team, adding that they "struggle to see" how buying out minority shares for at least 15 times earnings with "no obvious synergies" is positive in comparison to buying back its own shares at just over nine times earnings, with a positive earnings contribution of circa 4%.
"We therefore question the logic of this transaction," concluded KBW.
Broker Shore Capital that while it will take time to work through the announcement and interpret the detail, "we think that this could possibly be a politically-motivated transaction, as much as a financially-motivated one", as most of the minority stake is held by Hong Kong and Chinese retail investors.
HSBC already had control of the business, "so this is not about driving out synergies and savings", the Shore Cap analysts said.
"With that in mind, the acquisition multiple looks punchy, in our view, relative to the profitability and return on equity generated by the business."
Analysts at Interactive Investors said share buybacks "have been a big part of investors’ rationale" for holding shares in HSBC after the bank paid out $11 billion to shareholders last year.
They suggsted that other factors may be worrying shareholders, as Hang Seng Bank has been "caught up in China’s property crisis, pushing up its bad debts", while HSBC has been carrying out a major global restructuring and cutting costs.
However, CEO Georges Elhedery has been working on exits from less attractive markets, as well as increasing the focus on wealth management and on Hong Kong.