Cyprus scrambles to block hostile bank takeover

The government in the Republic of Cyprus is racing against the clock to arm itself with legal tools to prevent a takeover of the country’s biggest bank by an American private equity firm, which has until next month to submit an official offer that some shareholders may find hard to resist.

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Private equity firm Lone Star has until September 30 to submit a binding offer to buy the Bank of Cyprus, prompting the island’s largest financial institution to promise shareholders stronger returns and urge them to sit tight.

Ten days ago Bloomberg broke the news that Bank of Cyprus Holdings Plc had rejected three offers by the Texas-based company, which has until September 30 at 5pm to announce whether it will make a formal offer.

In previous months, Lone Star made various offers to BoC which had remained secret, but once the news was made public, transplant takeover rules and deadlines kicked in according to experts in local media.

On May 5, the Dallas-headquartered fund offered €1.25 per BoC share, upping the offer on May 25 to €1.38, while on July 8 Lone Star raised the price to €1.51.

All offers were rejected by the bank’s executive board which said the proposals “essentially undervalued the company and its future prospects.”

“The board believes that the proposal from Lone Star does not adequately address the complexities of completing a transaction to acquire Bank of Cyprus, given its strategic importance to Cyprus,” said the lender last week.

But Lone Star, which is known for seeking viable investment opportunities in markets that have suffered a crisis, has yet to clarify whether it would increase its €727 million bid to buy BoC.

Regulations dictate that once a takeover move has been made public, a tender offer must be registered with the Cyprus Securities and Exchange Commission.

Government seeks gatekeeper role through legislation

CySEC chairman George Theocharides said last week that the commission was closely monitoring Lone Star’s unsolicited non-binding takeover offers, with the Cypriot government openly siding with the board but reportedly lacking the legal tools to step in.

Any takeover, whether friendly or hostile, would still require the approval by the European Central Bank’s Single Supervisory Mechanism, but the Cypriot government is not taking any chances on the island's largest systemic bank.

Local media reported that the Cypriot government has prepared a bill that would allow the state to determine whether a direct foreign investment could threaten national security or public order.

The proposed legislation, which has been submitted to the Legal Department for review, could also provide tools for the government administration to block a takeover in “sensitive sectors” of the economy, such as banking.

But it remains to be seen in the weeks ahead if Lone Star will submit a binding offer.

The executive board has posted notices in local newspapers calling on shareholders not to take action, but reports suggest some shareholders might want to jump ship if the price is right.

After a financial crisis and concerns over returns, it remains to be seen whether a takeover move could be friendly or hostile.