A proposed transaction between regional lender Equity Group Holding and Atlas Mara Ltd (ATMA) has collapsed after the parties failed to reach an agreement on the valuation of four banks in Zambia, Mozambique, Tanzania and Rwanda.
"The new development on the ATMA transaction has everything to do with valuation and realities on these markets," said a market analyst who requested anonymity due to close working relations with Equity Bank.
The realisation that it could be walking into a costly deal has prompted Equity Group to rethink its plans to enter the Zambian and Mozambique markets, both grappling with a challenging macroeconomic environment.
The Kenyan-based bank has also developed cold feet on increasing its presence in the Tanzanian market where its subsidiary has been on a losing making spree and where it was fined $256,350 for flouting anti-money laundering regulations.
The EastAfrican has learnt that following a due diligence on ATMA operations in the four markets, the bank is no longer convinced that actualising the deal will be viable in the long term.
Equity had hoped to acquire the loss-making banks from the London-listed firm at a discount and with no money changing hands.
Although originally entering Zimbabwe with a takeover of ABCZim was part of the plans, Equity dropped Zimbabwe due to deep economic crisis including a volatile exchange rate and hyperinflation.
Of the four markets in the transaction, Equity has realised that only Rwanda offers positive prospects considering its subsidiary in the country is profitable after returning a $6.6 million profit for the period ending September 2019, up from $4.6 million over same period in 2018.
In Tanzania where Equity Group entered in 2014, its subsidiary posted a $5.4 million loss and the bank has repeatedly been forced to inject additional capital including $10 million pumped last year following the introduction of new prudential rules.
In Zambia, a fragile economy including the volatility of the Zambian currency, Kwacha, is causing apprehension that Equity Group could be walking into another tough market akin to Tanzania.
Last year, the Kwacha was the world's third worst performing currency having been on a losing stride against the dollar over the past four years. The currency depreciated by 5.3 per cent to 15.6 against the dollar in the last two weeks of December 2019, bringing its drop to 21 per cent.
Analysts forecast a free fall to continue due to panic buying of the greenback. Indeed the Kwacha's moodiness and over reliance on copper for stability is a major concern to prospective investors in Zambia.
The price of copper, Zambia's major export, has been swinging to the negative in recent times, sinking to a two-year low of $5,729.50 per tonne in August last year.
Apart from the currency, Zambia economy is struggling under the weight of debt that has surged to 92 per cent of gross domestic product from 66 per cent in 2017, extreme weather that is having adverse impacts on food production and soaring electricity and fuel prices are expected to drive inflation that stood at 11.7 per cent in December.
On Monday, Equity Group released a notice to the effect that a proposed transaction with ATMA that would have seen the bank make an entry into Zambia and Mozambique as part of plans to expand its continental footprint while increasing its presence in Tanzania and Rwanda has been put on ice.
The group announced the deal entered in April last year estimated to be worth $105.7 million hangs in the balance after the parties failed to sign detailed transaction agreements and the lapse of the binding term sheet.
In the transaction, Equity Bank was to acquire 100 per cent shareholding of African Banking Corporation Zambia (ABCZam), Mozambique (ABCMoz) and Tanzania (AMBCTz) and 62 per cent of the shares of Banque Populaire du Rwanda Ltd.
In exchange, Equity was to surrender an estimated 252.5 million new ordinary shares representing 6.27 per cent of the bank to Atlas Mara valued at Ksh10.7 billion ($107 million).
In a notice to shareholders, Equity Bank fell short of announcing the deal had collapsed, stating that although currently there was "no certainty that a transaction will materialize," negotiations are ongoing.
"EGH and ATMA expect to continue further discussions in early-2020 to try to reach mutually acceptable commercial terms with respect to the proposed transaction, or a variant of it," said Dr James Mwangi, Equity Group chief executive.
He added the bank remains committed to its strategic objective of expanding its footprint in Africa as part of a strategy to become sub-Saharan Africa's premier financial institution.
According to analysts, the new development over the transaction would not have major ramifications on Equity Bank stock, which continues to be among the leading movers at the Nairobi Securities Exchange.
"The deal will not have significant impact on the share price because investor sentiment was riding on the interest rates capping," said Justina Vuku, research analyst at Sterling Capital.
"It is fundamentally clear that it will take time before Equity Group can start making a return on investment in Zambia, Mozambique and Tanzania," said Vuku.