LEBANON: LEBANESE BANKS IN PLAY?

C O N F I D E N T I A L SECTION 01 OF 02 BEIRUT 001544 SIPDIS SIPDIS NSC FOR ABRAMS/SINGH/GAVITO/YERGER/DEMOPULOS, STATE FOR NEA/ELA E.O. 12958: DECL: 10/02/2017 TAGS: ECON EFIN ENIV PGOV PREL PTER LE SUBJECT: LEBANON: LEBANESE BANKS IN PLAY? Classified By: DCM William Grant for reasons 1.4 (b) and (d) SUMMARY -------------- ¶1. (C) Recent Rumors of the sale of BLOM Bank, to either Arab Bank or Audi Bank, were persistent enough to cause BLOM to issue a disclaimer. However, both BLOM and Audi tacitly admit unconsummated deals. Some regional player, almost certainly the Arab Bank, also tried to make a deal with one of the banks. A hostile takeover would be impossible, but a negotiated deal to sell BLOM could come at any time. Audi wants to expand, and considers BLOM and Byblos Bank to be for sale. End summary. MEETINGS WITH BANKS TO EXPLORE RUMORS OF SALES -------------- ¶2. (C) For the last two weeks rumors have been swirling around the Beirut "street" about the possible sale of the two largest banks in Lebanon -- Audi Bank and BLOM Bank. The persistence of the rumors and the details regarding the proposed deals prompted Econoffs to meet with principals in both banks, as well as Bank Med, on September 27 and 28 to seek confirmation. Saad Azhari, Vice Chairman and General Manager of BLOM Bank, denied the existence of any deal. Saying that the rumors were "bizarre," Azhari said that BLOM felt required to comment to the media about them. In fact, while we were in his office he took a call from Reuters to deny the story. Azhari said he felt compelled to call a board meeting for September 28 to discuss the rumors and to issue a statement. (Note: On Saturday, September 29, 2007, BLOM placed an ad in local papers to deal with the rumors. See paragraph 9, below. End note.) BLOM EXPLAINS SOURCE -------------- ¶3. (C) Azhari explained his assessment of the source of the rumor. About a week earlier Solidere, the publicly traded company which owns and operates downtown Beirut, paid a large dividend. A major client (unspecified) of Bank Med bought a significant number of Global Depository Receipts (GDR) in BLOM. (Note: GDRs are non-voting shares of a bank; in effect, these are bearer bonds. End note.) This purchase sparked a flurry of activity in BLOM GDRs, and subsequently in Audi GDRs as well. However, sales of publicly traded voting shares in the banks did not show any activity at all. Azhari denied that the bank was for sale, stressing that BLOM would prefer to remain independent. However, although he said that BLOM had not received any formal offer, he would neither confirm nor deny having discussed a possible sale with potential purchasers. WHY WOULD BLOM SELL? -------------- ¶4. (C) Azhari said BLOM cannot be the subject of a hostile takeover because the sale of any of the voting shares must have board approval. The board, which is composed of what Azhari refers to as the "big families" in banking, owns a controlling interest in the bank. In addition, any sale of more than 5 percent of any shares must have the approval of the Central Bank (CBL). Therefore, any proposed sale of BLOM would require management's knowledge. Azhari said that BLOM is doing very well, and has no reason to sell. He said that Audi Bank is not doing as well, and although their ratios are generally favorable, Audi is not as successful as BLOM with its expansion strategy. WHO MIGHT BUY? -------------- ¶5. (C) Azhari explained the nature of the various rumors, which confirmed what we had heard; potential purchasers were either the Lebanese banks Arab Bank, controlled by the Hariri family, or Audi. ¶6. (C) Although no one mentioned Bank Med as a part of the proposed deals, as a Hariri-family bank, and the source of the initial GDR buyer, Bank Med has a unique perspective on the situation. In a meeting with Bank Med executives Fouad Saad, Deputy General Manager and Head of Treasury, and Dr. Mazen Soueid, Chief Economist, we heard the same story about a key client purchasing GDRs. Saad said he had heard the BEIRUT 00001544 002 OF 002 rumor that Arab Bank would buy BLOM, but also that Audi was a target, but he had no idea of the potential buyer of Audi. Saad and Soueid both stated that Bank Med is in sound financial shape, despite massive write-offs in 2006. (Note: The general opinion of the banking "street" now is that Bank Med is shaky, and the Arab Bank is facing some serious challenges, related to management issues. End note.) AUDI WANTS TO BE A BUYER -------------- ¶7. (C) To complete the circuit we met with Dr. Freddie Baz, Vice Chairman of Audi Bank. Baz, who was as open as Azhari but more blunt, not only acknowledged the rumors, but also acknowledged that deals had been under discussion, but all had fallen through. Baz said that Audi, which is only slightly smaller than BLOM, wants to be the bank that "signs the front of the check," meaning the buyer, rather than the "back of the check," meaning the seller. Baz said that both BLOM and Byblos Bank, the third largest Lebanese bank, are for sale if the deal is right. According to Baz, Lebanese banks are undervalued and the shares are cheap, so institutional investors and other banks are interested in buying. Citing Arab Bank as the only real regional bank, Baz said that Audi has a five-year plan to make Audi a regional bank. He also explained that the management hopes to position Audi so that it cannot be sold, or at least the price will be very high. ALL DEALS NOW OFF -------------- ¶8. (C) When asked to confirm the existence of an offer from Arab Bank for BLOM, Baz would not comment, implying that it did indeed exist. However, he tacitly acknowledged that Audi did try to buy BLOM, but "all deals are off" right now. He said that it takes no time at all to put a deal together in this environment, because all the Lebanese banks know the details of each other's balance sheets. He also said that the increased interest in both BLOM and Audi GDRs was due to interest in profit taking among investors who believed that the value of both the buying and selling banks would increase, given any sale. BLOM ANNOUNCEMENT -------------- ¶9. (U) The BLOM announcement was as follows: For the purpose of total transparency with the capital markets, and given the circulating rumors regarding the offers to buy BLOM Bank S.A.L. shares or its merger with another bank, the Board of Directors of BLOM Bank S.A.L. confirms the following: ¶1. We have effectively witnessed a big interest in BLOM Bank's S.A.L. shares, which is considered as a positive indicator. ¶2. BLOM Banks' Board of Directors has never mandated anyone to negotiate such offers on its behalf and does not in any case encourage or support them. ¶3. The Bank's policy, which relies mainly on ensuring a strong organic growth rather than on mergers, has proven to be very successful. In fact, this policy has allowed BLOM Bank to maintain, for a long period of time, the first rank in the Lebanese banking sector, in terms of financial strength and profits. End quote. COMMENT -------------- ¶10. (C) Based on these conversations, and the subsequent BLOM announcement, we are convinced that both Arab Bank and Audi attempted to purchase BLOM, but without success. However, it is likely that several of the Lebanese banks are in play, and a deal could come together very quickly at any time. Given the public faith in the Lebanese banking system, which has remained stable and solvent through years of political turmoil, the potential sale of either of the two largest and most profitable banks will spark a lot of interest. Both banks hold a large amount of GOL securities; it is possible that non-Lebanese owners would not be as supportive of the GOL. FELTMAN