Fidelity eyes ‘$7.5m-plus’ profit boost in affiliate exit


Gowon Bowe


Tribune Business Editor


Fidelity Bank (Bahamas) will enjoy a $7.5m-plus profit “boost” for 2019 as a result of selling a 50 percent equity stake in its investment banking affiliate, it was revealed yesterday.

Gowon Bowe, pictured, the BISX-listed bank’s chief financial officer, told Tribune Business that its independent directors and advisers had determined that disposing of its ownership interest in RoyalFidelity Merchant Bank & Trust was the best way to “maximise shareholder value”.

Fidelity Bank (Bahamas) will receive $16.449m, plus half the investment bank’s undistributed earnings and retained earnings when the deal closes, in return for selling its stake as part of a management-led buyout that was approved on Monday.

Describing RoyalFidelity’s acquisition as akin to “a child leaving the nest, but having to pay the parent” to do so, Mr Bowe said its BISX-listed affiliate had decided the deal was in its best interests as it allowed for the instant creation of shareholder value.

The deal, which will result in RoyalFidelity leaving its parent once it closes and receives the necessary regulatory approval, effectively represents the break-up of the Fidelity Group of Companies, one of the largest and best-known financial services providers in the local market.

The group was itself created by a management buyout of British American’s Bahamas-based banking interests in the mid-1990s, and RoyalFidelity’s departure means the parent, Fidelity Bank & Trust International, now retains as its main local interest its 75 percent majority stake in Fidelity Bank (Bahamas).

While no longer members of the same financial services group, Mr Bowe said Fidelity Bank (Bahamas) would still look to its former affiliate as “the first choice” when directing clients to providers of capital markets products and wealth management services.

He added that RoyalFidelity had matured to the point where it could “fly on its own”, with independence allowing its management and new board to seize new growth opportunities and take the investment bank in their preferred direction.

“Fidelity Bank (Bahamas) 2019 results will be boosted by the sale of RoyalFidelity,” Mr Bowe confirmed to Tribune Business. “It’s difficult to say exactly until the unwinding of the undistributed profits, but effectively you’re looking at a $7.5m gain to the bottom line plus any profits earned from operations up to the date of closing.”

That date is currently projected to be early March 2019 (see other article HERE), meaning that Fidelity Bank (Bahamas) will be able to book its share of the merchant bank’s profits for the 2018 full year and first months of 2019.

Describing this as an “extraordinary profit” for Fidelity Bank (Bahamas) parent and the 25 percent minority shareholders, Mr Bowe said the BISX-listed institution had elected to reap the benefits of its 50 percent RoyalFidelity interest now rather than over time.

Explaining that the Board’s independent directors and advisers had determined it was better to realise “the present value of future cash flows today”, he added that this was “the best opportunity to maximise shareholder value, and we believe this achieves that”.

The RoyalFidelity stake has provided a significant boost to Fidelity Bank (Bahamas) own profitability, boosting this by $2.348m and $2.105m in 2017 and 2016, respectively, and accounting for around 10 percent of the bottom line in both years.

As a result, some shareholders and external observers may question the decision to exit now. Fidelity Bank (Bahamas) also received some $5.668m in dividends from its investment banking affiliate in 2016, with the total value of its investment pegged at just over $13m a year later.

However, the $16.449m “base” that Fidelity Bank (Bahamas) is due to receive alone represents an 84.8 percent increase on the $8.9m price it paid to acquire the 50 percent RoyalFidelity interest from its parent in the first place.

“It really boils down to the sale price,” Mr Bowe said of the decision to sell. “While you will be foregoing future profits, you are going to include in the sales price a projection of those future profits discounted for today.

“The sales price is a consideration of the profitability of the entity and value to shareholders of Fidelity Bank (Bahamas). The final recognition for this transaction is equal to projected earnings over time equivalent to the investment.

“This gives the new entity [RoyalFidelity] the opportunity to fly on its own, grow and do the things it wants to do. Fidelity Bank (Bahamas) shareholders will have the opportunity to maximise value and, upon completion of the transaction, excess and surplus capital will be distributed to the shareholders,” he continued.

“It will be an extraordinary dividend, and give Fidelity Bank (Bahamas) shareholders the opportunity to invest in other opportunities that may come forward.”

The Fidelity Bank (Bahamas) chief financial officer added that the merchant bank’s split from its parent was a typical transaction in more developed economies, where subsidiary companies “matured to the point where they can venture off on their own” and be spun-off to generate greater value for all parties involved.

“It’s a little bit like the child leaving the nest, but in this case the child is paying the parent,” Mr Bowe told Tribune Business. “In life there’s always evolution, opportunities and new horizons. It’s the next stage of the evolution process. It [RoyalFidelity] was birthed, grown, took on a partner, and now is going off on its own.”

He said clients of both Fidelity Bank (Bahamas) and RoyalFidelity “won’t see any change” as a result of the transaction, with both parties continuing to refer customers to each other for products/services they themselves do not offer.

“Where our customers have an interest in pensions, mutual funds, the capital markets and trusts that RoyalFidelity continues to offer, we would see them as providers of first choice,” Mr Bowe said, “knowing the structures, individuals and product lines.

“There’s still mutually beneficial opportunities that continue, and we will seek the best terms and opportunities for both sets of clients to utilise each other’s services despite not being in a subsidiary-parent relationship.”


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