BNP Paribas takeover of Fortis: is it a good deal for Luxembourg?

All articles are focusing on the value of the deal from the standpoint of BNP Paris, the Belgian state or shareholders of Fortis Holding, the quoted entity. But what about Luxembourg?

1. Let’s start from the rescue of Fortis on 28th September 2008

• The Luxembourg state brought €2.7 billion in exchange for a 49.9% stake in Fortis Luxembourg (now BGL) via a convertible bond, valuing the company at € 5.4 billion.
• BGL had a Cooke ratio of 11%.
• BGL had no exposure to toxic assets.
• With Luxembourg funds, the Cooke ratio stands at around 20% and should pass any stress test (I am assuming that, since the rescue, no toxic assets had been transferred by the Belgians into the Luxembourg subsidiary or no assets were withdrawn by the parent company).

2. What is Luxembourg getting with BNP Paribas deal?

• 1.4% in BNP Paris (vs 1.1% in the previous deal).
• Dilution to 34% of BGL (same as before).

3. Is it a good deal for Luxembourg?

• The implicit value of BGL is €6.9 billion on a BNP Paribas share price of €27, i.e. €1.5 billion more than the previous deal.
• On 2006 and 2007 bottom line (record years) this represents a PER of 11, way too excessive.
• I do not see what changes have occurred to justify a better valuation today than in September. If anything, the environment has substantially deteriorated, the DJ Eurobanks index losing 60% since.
• On September valuation, Luxembourg would have a paper loss of between €500 million (BGL has the same value as in September) and €1 billion (BGL value decreased by 30% i.e. 50% of the DJ Eurobanks index fall since).
• Luxembourg loses control of one of the major banks and employer in Luxembourg to a French Bank at a time where (French and other) are trying to widen the meaning of so called tax havens, and target Luxembourg among others. It is providing to the French a powerful political tool to pressure Luxembourg bearing in mind that arm-twisting is going to be the rule.
• Luxembourg loses the opportunity to take control of BGL and use it as a tool to develop Luxembourg financial center and to promote Luxembourg independence.

As a whole, and according to publicly available information, I rate this as a bad deal for Luxembourg.