MEXICO CITY, Feb 7 – Mining-focused conglomerate Grupo Mexico (GMEXICOB.MX) is moving closer to buying Citigroup Inc’s (C.N) Mexican consumer banking unit but faces an uphill path in selling the deal to skeptical investors.
Grupo Mexico, headed by billionaire German Larrea, is among the last candidates still standing in Citi’s year-long journey to sell its retail unit, known as Banamex, and has placed a bid of up to $8 billion for it, Reuters reported earlier this month.
But some analysts, shareholders and even Grupo Mexico executives have yet to be convinced of the deal’s industrial logic.
A Grupo Mexico executive, who spoke on condition of anonymity, said he was unconvinced by the decision to bid for Mexico’s No. 3 consumer lender by asset, adding that most directors had been “surprised” by it.
He added that Larrea has told insiders that the group wanted to invest idle cash in Banamex, having ruled out new investments in more turbulent markets like Peru, where Grupo Mexico already controls Southern Copper Co (SCCO.N).
A Grupo Mexico spokesperson declined comment on the directors’ stance toward the deal.
Citi struggled for years to meet its goal of turning Banamex, beset by a legacy of underinvestment and a series of scandals, into a “state of the art bank.”
A buy side analyst at a local fund invested in Grupo Mexico, who spoke on condition of anonymity, also said that the company would need to invest heavily in Banamex, given that big banks are feeling the squeeze from more agile fintech companies.
“The Mexican banking market is very competitive … Everyone is pumping capex into ‘going digital.’ So I think (Grupo Mexico) are getting into a business which requires (heavy) capex,” the analyst said. “I can’t see where the synergies are … It doesn’t make sense.”
Citi and Grupo Mexico both declined to comment.
The heads of Mexico’s banking association also declined to comment about the prospect of a miner taking over a bank when asked at a conference in late January.
MARKET WOBBLES
Banamex’s share of the loan market has fallen to 9.3% from 22.5% when Citi bought it in 2001 and has consistently lagged its peers in return on assets, according to regulator data.
Meanwhile, Larrea could face obstacles in cutting costs at the formerly state-owned bank given that Mexican President Andres Manuel Lopez Obrador has said he opposes sweeping layoffs.
The prospect that Grupo Mexico could be saddled with an expensive and unwieldy new subsidiary has spooked some analysts.
HSBC downgraded the company to “hold” from “buy” when initial reports emerged in December that it was exploring the deal.
“We see no synergies or rationale for the acquisition,” the HSBC report said.
Jose Vazquez, a financial analyst at Grupo Bursatil Mexicano, agreed it was difficult to see the move positively.
“Adding a new arm which is completely different … without a doubt, the market wouldn’t take that well,” he said.
Indeed, shares in Grupo Mexico – generally a strong performer this year – fell 9% in mid-January following media reports that Larrea was in pole position for the deal.
The businessman is expected to use the publicly traded conglomerate to finance the sale rather than doling out the cash himself.
In an earnings call last week, Grupo Mexico declined to answer questions about the deal.
THE BRIGHT SIDE
Local investors and analysts are not universally bearish on the potential deal, with some citing Larrea’s business savvy.
“I see it more like a mogul buying a bank than a miner (buying a bank),” said Carlos Alberto Gonzalez, director of analysis and stock market strategy at Monex. “A bank is always going to complement a portfolio.”
Larrea would not be the first Mexican billionaire to add a bank portfolio to his empire. Carlos Slim, the country’s richest person, made his fortune in telecoms but also counts Inbursa (GFINBURO.MX) bank among its holdings.
Meanwhile, analysts at Barclays argued late last year that “a quality retail banking business (could) smooth the volatility of the mining business.”
Yet banks also carry heavy technological and regulatory burdens, which could be a heavy lift for Grupo Mexico given its inexperience in the financial space, said David Suarez, former chief financial officer at Banamex rival Banorte (GFNORTEO.MX), now vice president at an agricultural investment trust.
“(Investors) are concerned about Grupo Mexico’s lack of experience to manage a bank of that size,” he told Reuters, emphasizing that Larrea will need to attract or retain “top notch” silver-haired teams across management and the board.
“This is a national, retail bank, it’s an entirely different scale (to a niche, regional operation),” he said.
Reporting by Isabel Woodford in Mexico City
Additional reporting by Diego Ore in Mexico City
Editing by Christian Plumb and Matthew Lewis
Our Standards: The Thomson Reuters Trust Principles.
Source: reuters.com
