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Two of Greece’s largest financial institutions announced merger plans on Monday in a deal that better positions major shareholder Fairfax Financial Holdings Ltd. for a rebound in the Greek economy.

Eurobank, the third largest lender in Greece, plans to acquire real estate investment company Grivalia Properties in an all-stock transaction valued at US$866-million. The deal significantly boosts the bank’s capital and lifted the share price in both publicly traded companies on Monday. Eurobank stock surged 23.8 per cent to 58.5 euro cents on the news of the transaction, while Grivalia stock jumped 10.6 per cent to €7.93.

Toronto-based Fairfax, an insurance company founded by value investor Prem Watsa, owns 18 per cent of Eurobank and 54 per cent of Grivalia, and will end up as the largest shareholder in the merged business with a 33-per-cent stake. Eurobank is one of four large Greek banks, with 350 branches and 9,000 employees, and has operations in five other European countries.

Fairfax focuses on out-of-favour companies and sectors and began building stakes in Greek financial institutions in 2014, when the country was in the midst of a long-running financial crisis. To date, Mr. Watsa has lost money on his Greek ventures.

Fairfax’s latest financial report shows the company invested US$1.4-billion in four Greek companies, including a US$975-million commitment to Eurobank. At the end of 2017, the last time Fairfax disclosed the value of all its holdings, positions in Eurobank, Givalia and two smaller companies were worth US$1.02-billion, a 28-per-cent decline. In that report, Mr. Watsa, Fairfax’s chairman and CEO, said: “2018 should be the year for Greece as the government fulfills all its requirements to exit the ECB [European Central Bank] program.”

Fairfax’s approach to European banks has made money in the past. The company tripled its capital on a 2011 investment in the Bank of Ireland, exiting the holding after about four years and pocketing a gain of more than €500-million. In an interview Monday, Mr. Watsa said Fairfax remains a “patient investor” in Eurobank, as the Greek economy now resembles Ireland’s situation three years ago with business confidence rising and consumer spending on homes and cars expected to anchor strong economic growth.

“Fairfax has a long history of profiting from asset re-pricing in times of high volatility,” CIBC World Markets analyst Paul Holden said in a recent report. Fairfax stock closed Monday at $600.01 in Toronto and Mr. Holden has a $725 target price on the shares. Along with its investments in Greece, Fairfax owns the Canadian arm of retailer Toys ‘R’ Us, which filed for bankruptcy in September, and a significant stake in tech company Blackberry Ltd.

Eurobank’s takeover of Givalia is expected to close in the spring of 2019 and features a number of benefits for shareholders in both companies, including Fairfax. As part of the transaction, Grivalia will pay out a €40.5-million special dividend. Once the merger is complete, Eurobank will launch its property-management business as a wholly owned unit with €2.1-billion in assets, run by Grivalia CEO George Chryssikos. And Eurobank will spin out a portfolio of non-performing loans worth approximately €7-billion into a separate entity, which will be sold or wound down over time.

Eurobank said the deal will help it cut its ratio of bad loans or so-called non-performing exposures (NPEs) to 15 per cent of capital by the end of 2019 from 39 per cent in the third quarter, and reduce it to single digits by 2021. “The proposed merger with Grivalia is a landmark transaction,” Fokion Karavias, CEO of Eurobank, said in a press release. “Having largely addressed our legacy issues, we will be able to turn our full attention to serving our clients," he said.

With a stronger balance sheet coming out of the takeover, Eurobank executives said they plan to expand both their commercial and residential lending businesses, and attempt to win more work in the investment banking division.

Eurobank said the deal had the support of both company’s boards, along with Greece’s HFSF bank rescue fund, which holds a 2.4-per-cent stake in the bank.

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