Why Merchants Bank, the nation's most profitable lender, has reportedly agreed to take over Hong Kong's Wing Lung Bank in a cash deal valuing the company at $4.66 billion.

Merchants Bank signed an agreement today to buy a 53 percent stake at HK$156.50 per share from Wing Lung Chairman Michael Wu and his cousins, according to two people with direct knowledge of the matter who declined to be identified, before an announcement scheduled for June 2. The price is a 6.2 percent premium to yesterday's close.

The Shenzhen-based bank beat out Industrial & Commercial Bank of China Ltd. and Australia & New Zealand Banking Group Ltd. in a three-month battle to win 35 branches in Hong Kong, which has the world's highest ratio of millionaires. Merchants Bank, 12 percent owned by a state investment arm, is paying 3.1 times book value for Wing Lung, more than Chinese regulators recommended, in its first acquisition outside mainland China.

"It's not cheap, but nothing is cheap these days," said Winson Fong, who helps manage $3 billion in Asia outside Japan at SG Asset Management Hong Kong Ltd. "It's a very convenient way to open 35 branches in Hong Kong and at the same time hiring a bunch of banking professionals in one go."

Both banks were halted from trading in Hong Kong today. Merchants Bank plans to complete the purchase of the Wu family's stake in three months before making a general offer to other shareholders for the entire company, the people said.

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