Banco Santander S.A., the euro-zone’s largest bank by market value, successfully completed Mexico’s largest-ever share offering, and the third largest this year behind Facebook and Japan Airlines, by selling a 24.9% stake of its Mexican unit, Grupo Financiero Santander México S.A.B. de C.V. (“Santander Mexico”). According to Bloomberg, the U.S. (NYSE:BSMX, ADSs) and Mexican (BMV:SANMEX, series B shares) public offering raised between €2.77 billion ($3.57 billion) and €3.18 billion ($4.09 billion). With orders for shares totalling approximately $20 billion, the offering was unquestionably attractive for investors and indicates a high level of investor confidence and interest in the Mexican financial sector.
As reported by the The Economist, Mexican banks (Santander Mexico in particular) are very profitable; Santander Mexico’s return on equity between August 2011 and July 2012 was 19.3%, compared to 20.4% for BBVA Bancomer (BBVAS’s private Mexican unit) and 5.7% for HSBC’s private Mexican unit during the same period. According to the IPO prospectus, Santander Mexico accounts for approximately 12% of the Santander Group’s attributable profit for the six-months ending June 30, 2012. In addition, the Financial System Stability Assessment published by the IMF in December 2011 indicates that the Mexican banking system “appears to be sound and profitable” and “private banks appear to be well-capitalized.”
Regardless of alluring profit returns, investors should be aware of the corporate governance risks relating to the newly listed ADSs and series B shares. Banco Santander will still retain control of 75.1% of Santander Mexico, giving it the power to appoint the majority of its board, appoint its principal officers, declare dividends and agree to sell or transfer its controlling stake. Essentially, the economic and voting power of minority shareholders is extremely limited. Moreover, according to the IPO Prospectus, Santander Mexico may not legally be permitted to allow ADS holders to exercise any preemptive rights in any future capital increases, potentially leaving minority investors diluted in future share offerings or placements.
There is also this major issue: according to its IPO prospectus, Santander Mexico “will not” treat ADS holders as shareholders and they may not be able to exercise shareholder rights, particularly with respect to voting, due to Mexican bureaucratic and procedural steps involving the depository (holders of series B shares) and the underlying ADSs. Voting rights may be exercised by series B shares represented by ADSs only in accordance with the deposit agreement relating to the ADSs, which may introduce additional restrictions. Santander Mexico also states that only series B shareholders will receive notice of a shareholders’ meeting and will be able to attend each meeting in person or vote by proxy; ADS holders will not receive notice directly from the Company and may only receive notice and voting instructions from the depository. At this point, it is up to each ADS holder to provide voting instructions to the depository voting the series B shares. With the generally untimely disclosure of shareholder meeting materials and relatively early voting deadlines in Mexico, the process for exercising voting rights of ADS holders could be rather onerous. In the event that voting instructions are not received in a timely manner, the controlling shareholder may vote on behalf of those shares at its discretion.
For investors that can and have come to terms with the governance risks related to investing in Mexico, Santander Mexico appears to be a very attractive opportunity given the country’s growing economy (which outpaced average world GDP growth rates in 2010 and 2011), young population and expanding middle class (higher number of individuals in need of financial services) and low credit penetration (high growth potential).
Will the IPO of Santander Mexico pave the way for international banks with Mexican banking units to follow its lead? Who will be next – BBVA, HSBC, Citigroup, Scotiabank? Stay tuned.