DB&G directors, which include president Garfield Sinclair (left) and chairman Peter Bunting, have recommended that shareholders accept the BNS offer. - File

Scotiabank Jamaica insists that it bid a fair price for Dehring Bunting & Golding, suggesting that once the fat is trimmed from the investment banks last annual profit, the offer of J$21.08 share compares favourably with price/earning ratios of its competitors in the market.

And not only has DB&G historically traded at ratios below its peers, Scotiabank argues in a statement released Wednesday, it will, given the emerging market climate, in the future likely find it "increasingly difficult to maintain its previous revenue growth as a stand-alone entity."

Scotiabank Jamaica, a listed subsidiary of Canada's Bank of Nova Scotia (BNS) had total assets at July 31 of $194 billion while nine-month profit at the was $4.98 billion. Its overall profit in the previous financial year was $5.9 billion.

Just over a fortnight ago, Scotiabank formally launched its take-over bid for DB&G at a price that would value the 14-year-old investment bank at $6.5 billion. And, on the face of it, the offer price would be approximately seven times earnings. For its financial year ended March 31, DB&G reported net profit of $882.3 million, up $79.7 or approximately 10 per cent over the previous financial year.

In that context, some critics have claimed that Scotia's offer, recommended by the DB&G board - including executive directors, Peter Bunting, Mark Golding and Gary Sinclair, who hold 40 per cent of the listed company - is underpriced. But Scotiabank, in its statement, suggests that such arguments are based on incomplete analyses that fail to disaggregate DB&G's income data.

Offer price hike

For instance, Scotiabank, whose CEO Bill Clarke, has already signalled that there is unlikely to be a hike in the offer price, points out that in the last quarter of its 2005/2006 financial year, DB&G sold assets that booked $250 million to the bottom line. "If we exclude this gain the company's results would have been closer to $640 million," Scotiabank says. Or looked at another way, what Scotiabank describes at DB&G's core profit is nearly 30 per cent below what the investment bank booked at net return in its last financial year. Scotiabank's implied argument, in part, is that if the 'core' profit figure of $640 million is used as the basis for the analysis, then its offer would be more like 10 times earnings.

In any event, Scotiabank argues, its offer "compares favourably with (DB&G's) competitors in the market," Scotiabank says.

"Further research has shown that DB&G has consistently traded at PE ratios below its peers," it says.

In fact, that $640 million profit is the benchmark return that Peter Bunting, Mark Golding and Gary Sinclair, who would stay with DB&B for at least two years after the take-over, have guaranteed in their sell-out agreement with Scotiabank. The arrangement provides for a grab-back by Scotiabank from the group if profit falls below the benchmark.

Scotiabank, which hopes DB&G will provide it with easier entry into a market segment in which is weak, says that it wants at least 75 per cent, but no more than 80 per cent of DB&G, as under Jamaica Stock Exchange taker-over rules its offer is open to all shareholders.

But whether it acquires DB&G or not, the market environment, going forward, will not be easy for the investment bank, Scotiabank suggests.

Says Scotiabank in its statement: "When one takes all the factors into consideration, low interest rates, foreign exchange stability and reduced security gains, DB&G is going to find it difficult to maintain its previous levels of revenue growth as a stand-alone entity ..."

Moreover, the DB&G will face greater competition in an active market where financial firms are diversifying.

"The price being offered by Scotiabank ... represents a real and fair opportunity for investors to cash out in an illiquid market, which has been bearish for two years," the statement says.

The bank later said the comments were the position of an analyst, and not an official statement, but called them "insightful."

- business@gleanerjm.com