Spotlight: The merger of Chile’s Bicecorp and Grupo Security

Chilean holdings Bicecorp and Grupo Security made big headlines in January when announcing their plan for a merger to create a financial services group with US$43bn in assets and more than 2.4mn clients.

The operation is currently in the due diligence phase and expected to close during 2H24 and be fully implemented in 2025.

The merger will see Bicecorp absorb Security after regulatory approvals and a tender offer for 100% of the latter’s shares. 

Bicecorp and Security decided to join forces for several reasons. To bolster their market share and already-strong capital position, increase business and product diversification, speed up the digital transformation of their businesses, reduce local and international funding costs through a larger balance sheet – and take advantage of what they view as similar corporate cultures.

BNamericas takes a look at some of the merger’s key risks and impacts with insights from two ratings agency directors.

REGULATORY AND EXECUTION RISKS

The key regulatory approvals that will have to be obtained for the merger to go ahead will come from Chile’s financial market regulator CMF and competition authority FNE.

On a recent Q1 results call, Security executives said the requests have been filed and they hope and expect the approvals to be granted in the second half so the deal can be finalized this year. 

Fitch Ratings does not expect the deal to face major regulatory risks as the merged group’s biggest subsidiary, the combined bank, will not be large enough to be considered systemically important, Abraham Martínez, the agency’s director of Latin American banks, tells BNamericas. 

“The merger would present problems if the regulatory entities evaluating the case would consider it harming free competition or having negative effects on clients. We have no records that give any indication that something like that could happen with this operation,” says Pablo Galleguillos, senior director of financial institutions at local ratings agency ICR Clasificadora de Riesgo, an affiliate of Moody’s Investors Service.

Given that both Security and Bicecorp have Peruvian businesses, the ownership changes of these subsidiaries will also require approvals from the Andean nation’s competition authority Indecopi and financial services regulator SBS, adds Martínez.

In Peru, Security owns insurer Protecta and a travel agency focused on the corporate segment, while Bicecorp has a vehicle financing business that was created in 2023. Protecta is the eighth largest insurer overall and the biggest player in the life annuity segment.

Galleguillos tells BNamericas that the merger’s execution risks are mainly linked to the integration of different organizational cultures and operating systems, “similar to what occurred with other mergers in the industry, mainly in the banking sector.”

Martínez says execution risks are not very high, given that the two groups have relatively similar strategies, businesses and corporate cultures. “However, Fitch will explore further whether there could be any material overlaps in borrower, sector, or depositor concentration that could represent a challenge in a post-integration stage,” he adds.

MERGER IMPACT

The merger will not have any significant impact on other business sectors as the groups involved are not big enough to cause such an effect, according to Martínez.

In the financial system, the main impact will be seen in the banking and insurance sectors, as well as the asset management industry. The banking units are the most important subsidiaries of both groups in terms of assets and profit generation.

Banking industry 

In the banking sector, these subsidiaries are medium-sized players with Banco Bice ranked seventh and Banco Security right behind in eighth place. 

The merged group’s bank will have a loan market share of nearly 7% and not move above seventh place since there is a large distance to the six biggest banks, with the closest rival being Itaú in the sixth spot with around 9.5%.

Santander, Banco de Chile, state-owned BancoEstado, Bci and Scotiabank are the five largest players in the sector.

Both Bicecorp and Security have a strong focus on lending to companies, and in the commercial loan segment the merged bank will have a larger share of around 10%.

Regarding the possibility of more banking sector M&As, Martínez says that the Chilean sector has a high degree of concentration, with the top 5 banks holding about 77% of domestic sector assets in 2023, and few small players left as potential acquisition targets.

Insurance sector

In the life insurance industry, the merger will have a major impact as the groups’ combined subsidiaries will climb several places in the rankings.

Bice Vida currently sits in sixth place and Vida Security occupies the eighth spot in terms of direct written premiums. The merger will see the new company move up to fourth place, trailing Penta, Consorcio and leader MetLife. 

In the life annuity segment, Bice Vida and Vida Security are also ranked sixth and seventh, and combined they will climb to third place behind Consorcio and MetLife.

Regarding the state of play in the annuity segment, Galleguillos says it is in a consolidation phase with some companies exiting while other larger players are pursuing inorganic growth strategies.

Other businesses

By combining their forces, Bicecorp and Security will also make strides in the asset management industry where they will become the fourth biggest mutual fund player, moving up from sixth and eighth place previously.

Both groups also have a number of other subsidiaries that provide different types of financing and asset and wealth management services, and that will command a larger market share as a result of the merger.

Q1 RESULTS

Bicecorp and Grupo Security both posted year-on-year earnings growth in the first quarter.

Profits at Bicecorp amounted to 73.8 billion pesos (US$81.3 million), representing an increase of 113% from a year earlier.

The strong expansion was driven by the performance of Bice Vida, which boosted its net earnings to 36.7bn pesos from 3bn pesos, and Banco Bice’s earnings growth of 16.6% to 38.5bn pesos.

The group’s ROE for Q1 was 21% compared to 10.5% in the same period last year.

Security increased its first quarter profits 7% to 45.3bn pesos.

The result showed the great importance of Banco Security for the group, with earnings of 44.5bn pesos, up 2.1% year-on-year.

Vida Security had a bad quarter and saw profits drop 19.3% to 10.1bn pesos.

Groupwide ROE was 17.4% in Q1 compared to 18.5% a year earlier.

MERGER DETAILS 

The agreement announced in January was reached by Bicecorp and its controller Forestal O’Higgins with a group of shareholders owning 65.2% of Grupo Security’s voting shares. 

After further negotiations, the parties signed a final share purchase agreement on April 10, and a 60-day due diligence process kicked off on April 17.

After regulatory approvals, a tender offer will be launched for 100% of Grupo Security’s shares, with Forestal O’Higgins paying for 20% of the shares in cash (at 285 pesos per share) and 80% will be swapped for newly issued Bicecorp shares. The transaction values Bicecorp at around US$1.88bn and Security at US$1.25bn.

To be considered a success, the offer has to obtain a minimum acceptance rate of 62% from Security shareholders.

Forestal O’Higgins is the holding of the local Matte family, with interests in a wide range of sectors, including financial services, telecommunications, energy, mining, and the pulp and paper industry. 

After the conclusion of the tender offer, Forestal O’Higgins will control Bicecorp with a shareholding of around 68%.

The shareholders who currently hold 65.2% of Security’s voting shares will have the right to elect three board members for six years after the merger, as long as they keep a shareholding equal to or more than 20%. The parties also agreed on a dividend payout ratio of 50% of Bicecorp’s net income for the first three years after the merger.