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Raiffeisen International, the second-largest lender in Central and Eastern Europe, and its Austrian parent RZB Group on April 19 kicked off the effort to sell their proposed merger to shareholders by releasing the preliminary valuations of the units to be merged, as well as restating the rationale behind the tie-up.

Raiffeisen said in a statement that the free float in the combined bank would drop to between 21.2% and 22% from the current 27% when the deal to remerge it with its parent is completed. The shareholders of unlisted RZB, mostly regional cooperative banks, will accordingly hold between 78% and 78.8% of the combined entity, to be called Raiffeisenbank International, up from the 73% they have in Raiffeisen now.

This share exchange ratio, arrived at by the banks' auditors BDO and Deloitte, was slightly less than that laid out in an internal memo obtained by Reuters in February, which had tentatively estimated free-float shareholders' share of the merged company at 23%, based on unconfirmed respective valuations of €6.2bn and €6.1bn for Raiffeisen and RZB. Even so, the removal of some of the uncertainty surrounding the merger helped lift the shares of Raiffeisen 6.8% by mid-afternoon to €38.35, up 68% from the low of €22.77 hit in February.

The next key date on the calendar is May 30, when the full merger documentation will be published, including exactly what parts of RZB's business will be merged, along with the first-quarter results of Raiffeisen. Czech brokerage Wood & Co says RZB businesses that will be merged include Centrobank (corporate banking), an Austrian leasing company and the private banking operations.

At pains to show the transparency and fairness of the deal for all sides, Raiffeisen said the exchange ratio will first have to be approved by a court appointed auditor. Three investment banks will also offer fairness opinions before the proposals are put to both sets of shareholders at their annual general meetings on July 7-8

Reasons to be cheerful

Herbert Stepic, the current CEO of Raiffeisen and future head of new Raiffeisenbank International, reiterated that the strategic rationale behind the merger - what he called a "no-brainer" - is all about funding. "As soon as the growth in Central and Eastern Europe has revitalised in the near future, funding is becoming key to capturing the opportunities out there," he told a conference call.

"Although we consider ourselves capable of capturing this potential, we feel it's the right time to retain the competitive edge and to further improve our position... This merger will enable us to gain full and direct access to all funding and capital market products, and we will able to benefit from the reallocation of selected resources of the old RZB into the most attractive market opportunities," he said.

In addition, there would be cost-saving synergies and efficiency gains in areas such as IT and risk management.

Stepic said both parties are doing this merger from a position of strength after toughing out a difficult 2009 in reasonable shape. However, it's this point that prompts some analysts to question why, after coming through the crisis so strongly, Raiffeisen would now want to dilute its strong emerging-market driven earnings with the slow-growing earnings of RZB from its more mature markets. Stepic said earnings per share in 2009 attributable to Raiffeisen shareholders if the merger had been in place would, on a pro forma calculation, have been considerably higher, up from €0.99 per share to €1.50-1.55 per share. However, as the crisis recedes, Raiffeisen's profits are expected to once again outpace those of RZB.

Stepic also sought to reassure shareholders that the merger is not a ploy to help RZB achieve a capital increase to meet the new Basel III rules on reserves and pay back government aid. "With Tier-1 capital of 9.1%, we feel we have sufficient capital, even with the forecasted moderate growth," Stepic said. "We will only carry out a capital increase if a possible acquisition in Eastern Europe were to present itself and for which we have no capital cushion."