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The sharp decline of the Turkish lira in recent weeks has triggered speculation in banking circles that Emirates NBD stands a chance to renegotiate its deal to acquire Denizbank as the valuation has declined substantially in dollar terms from the time of its acquisition.
The Turkish Lira has lost more than 40 per cent against the dollar so far this year, and 45 per cent from the time of acquisition making the valuation of the stock cheaper by nearly $1 billion in dollar terms.
Emirates NBD agreed to buy the Turkish bank from Russia’s Sberbank for 14.6 billion liras worth $3.2 billion on May 22. “The fall in the Turkish lira might trigger a materially adverse clause [MAC] that would benefit Emirates NBD, creating the possibility of renegotiating the deal with Sberbank. This could reduce the purchase price of the Turkish Denizbank by up to 27 per cent, making it more manageable from a capital perspective,” said Jaap Mejir, managing director and head of Equity Research at Arqaam Capital.
With the valuation losses mounting by day and the potential for Turkish situation to emerge into a full-blown financial crisis, analysts say it might make more sense for Emirates NBD to walk away form the deal, even if the bank has to pay a penalty of up to 10 per cent of the original price tag. We would not be surprised if Emirates NBD would walk away from the deal even if it would trigger a penalty clause, given evolving events in Turkey and a looming financial crisis,” said Mejir.
Emirates NBD said it is closely monitoring the situation in Turkey but did not comment on the possibility of renegotiating the purchase price of Denizbank. “As is standard practice with any sale and purchase agreement, it contains various terms, conditions and clauses. These terms, conditions and clauses are negotiated as part of the overall commercial terms and are subject to a confidentiality agreement between the concerned parties. We are therefore unable to make any further comment on such content. Needless to say we are closely monitoring the situation,” the bank said in an emailed statement. Banking sector analysts and experts in cross border acquisitions said Emirates NBD would stand to gain substantially in terms of valuations of the deal could be renegotiated, but that possibility hinges on the terms of the contract entered. Big ticket cross border acquisitions usually come with extensive terms of contract that covers currency risks or such other risks arising from a substantial change in business environment.
Emirates NBD’s deal to acquire Denizbank being a large acquisition, analysts say it will almost certainly have a clause that will trigger the possibility of a renegotiations.
“Although the transaction was closed in the US dollar, the magnitude of the currency movement could trigger a commercial terms and clauses to be re-negotiated. While we are unaware of the exact commercial terms, there appears a good reason for the deal to be re-valued, if the currency decline is not contained [or reversed in any reasonable time],” said Aarthi Chandrasekaran, vice-president of Shuaa Capital.
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