Mega Bank Merger Deal Re-Drawn To Ensure Easier Passage, Say Sources

IT is unlikely that the listing committee of Bursa Malaysia will give a waiver to the Employees Provident Fund (EPF) to vote for the proposed merger of CIMB Group Holdings Bhd, RHB Capital Bhd and Malaysia Building Society Bhd (MBSB), according to sources.

It was with this assumption in mind that the CIMB-RHB-MBSB merger was structured in the current way to enable it to go through, sources say.

This is because with RHB Cap being the acquirer, it will only need approval of 50% plus one share. If RHB Cap was being acquired, then the requirement for shareholding approval is 75%, and this would be tough because Aabar Investments would then hold the trump card.

Currently, the three largest shareholders of RHB Cap are the EPF with a 40.93% stake, Aabar Investments with a 21.22% and OSK Holdings Bhd with a 9.94% stake.

With the EPF being unable to vote, Aabar’s effective stake would be 35.9%. Supposing Aabar votes against the deal, chances are still high for the deal to go through, if the majority of the other minority shareholders vote for the deal.

If a 75% approval was needed, then the fate of the deal would lie with Aabar.

Shareholding-wise, 70% of the enlarged entity will be owned by shareholders of CIMB Group with the remaining 30% by shareholders of RHB Cap.

The other issue to consider is that the definitive sale and purchase (S&P) agreement has yet to be signed.

For now, the next milestone will be the due diligence process, with the view of signing definitive S&P by the first quarter of 2015.

Approvals will need to be sought, before the deal is expected to be completed by mid-2015.

“We can expect a lot more negotiations behind the scenes until the definite agreement is signed,” said the source.

Will Aabar stand in the way?

In regards to the major shareholders, EPF and Khazanah will cumulatively have some 45% stake in the merged entity post merger.

Meanwhile, Aabar Investments’ stake will be diluted to 6.3% in the enlarged entity from a stake of 21.2% in RHB Cap.

The EPF will still be the single largest shareholder in the merged entity with a 22.6% shareholding.

Khazanah Nasional is a close second with a 20.5% equity stake.

As to whether Aabar Investments will throw a spanner in the works considering its investment cost of RM10.80 per RHB Capital share back in June 2011, Public Investment Bank’s research head Ching Weng Jin thinks this particular mode of transaction is a win-win situation for all.

He does not see Aabar scuttling the deal, given the implied value of RM10.03 per RHB shares with which the CIMB shares are being swapped for.

“With the 58 sen dividend received in recent years, its inconsequential ‘loss’ will be more than adequately made up from the earnings growth potential of the combined entity,” says Ching.

On Thursday, details of 2014’s most anticipated mega-deal to create the nation’s largest banking group were revealed.

While RHB Capital Bhd appears to be the acquirer and eventual listed entity, it is still CIMB’s board and management that will be in the drivers seat of the new merged entity.

From an accounting perspective, CIMB is the acquirer, as it is the larger entity.

CIMB group chairman Datuk Seri Nazir Razak highlighted five key reasons why this deal is a must.

Firstly, it achieves the scale necessary for the enlarged group to compete in the Asean community space, while also cementing its position as Top 5 within the region.

Secondly, it achieves economies of scales with synergistic benefits. It is a compelling financial proposition for CIMB Group shareholders as the deal is earnings accretive though ROE dilutive in the near term.

Fourthly, it allows for a rebalancing of its geographical portfolio and to tap on each entity’s core strengths. Finally, it creates a new growth engine in Islamic finance.

All three banks announced to Bursa Malaysia that the merger will see the CIMB Group, which is the second largest banking group in Malaysia, dispose all its assets and liabilities of RHB Cap via a share swap at an exchange ratio of one RHB Cap share for 1.38 CIMB Group shares.

This is based on a benchmark price of RM7.27 per CIMB Group share and RM10.03 per RHB Cap share, translating into a price-to-book value (P/BV) ratio of 1.7 times and 1.44 times for CIMB Group and RHB Cap, respectively.

This valuation is based on CIMB Group and RHB Cap’s book values of RM4.28 and RM6.97 as at June 30.

In terms of the all-share swap for the merger, this will require an issuance of 6.04 billion new RHB Cap shares and enlarge the share capital of RHB Cap to 8.61 billion shares.

The second part of the deal involves the proposed merger of CIMB Islamic, RHB Islamic and MBSB to create a mega-Islamic bank. This newly created mega-Islamic bank will remain a subsidiary of the merged CIMB-RHB.

Under this deal, CIMB Islamic will acquire all the assets and liabilities of MBSB at RM7.77bil or RM2.82 per share. MBSB shareholders will have a choice either to accept cash or new shares in the unlisted CIMB Islamic group.

At RM2.82 per MBSB share, this represents a P/BV of 1.91 times.

Analysts generally opine that valuation wise, the P/B (price to book) multiple on the agreed pricing for CIMB Group and RHB Cap at 1.7x and 1.44x to facilitate the share swap exercise appears to be decent.

“On MBSB, the valuation of 1.91x P/B multiple was slightly higher than expectation of 1.75x. Nevertheless, this was justified on the basis that MBSB will be privatised and on consideration that MBSB shareholders will be offered either unlisted CIMB Islamic shares or cash as payment,” says Kelvin Ong, a banking analyst at MIDF Research.

AllianceDBS Research Lim Sue Lin says that capital levels are ambiguous at this juncture but management has targeted a Common Equity Tier 1 (CET-1) of 9.5%.

“Potential asset rationalisation could buffer capital levels. Treatment of goodwill is also unclear at the moment although there are differing views from an accounting standpoint,” she says.

The newly merged entity of CIMB-RHB will be a majority shareholder in the mega-Islamic Bank. Its stake will depend on whether shareholders of MBSB choose to accept cash or unlisted CIMB Islamic shares.

If it is an all-cash payment, then CIMB-RHB will hold 100% in the mega Islamic Bank. If, however, MBSB shareholders choose to received unlisted shares, the CIMB-RHB will hold 58%.

Synergies?

It appears that synergies will come from cost savings rather than from the revenue. Management hinted that some 86% of total synergies will come from the cost side.

They include IT synergies and the potential shift of some duplicative cost to the mega-Islamic Bank.

“We understand some legacy RHB and CIMB staff will be moved to the mega-Islamic bank. Also, cost rationalisation could also be undertaken at the main vehicle,”

“On the potential revenue synergies, management sees synergistic benefits from the retail, SME banking and Singapore operations.

“Guidance on the quantum of cost and revenue synergies has yet to be provided,” says Ong.

Should shareholders of MBSB choose to take cash, and CIMB-RHB owns 100% of the mega Islamic bank, Ong sees a dilution to June 30, 2015 earnings per share of 35%.

This is due to the consolidation of six-month results of CIMB and MBSB as the merger is expected to complete by the first half of 2015.

However, on the 12-month basis results of CIMB and MBSB, the EPS of the merged entity will be slightly accretive at 91.8 sen.

Over the shorter term, there is also an expected dilution on its FY15 ROE.

Overall, there will be an immediate dilution impact on ROE as well as on its EPS which the latter is due to the timing for consolidation of the results of CIMB Group and MBSB.

“Nevertheless, the merger is positive over the longer term. This is in view that EPS and ROE are likely to be accretive towards the later years once synergistic benefits kick in,” says Ong.

For now, Ong is maintaining his “buy” call on RHB Cap with an unchanged target price of RM10.70 and a “neutral” rating on CIMB Group with an unchanged target price of RM8 pending further clarity on the outcome of the regulatory approvals required.

“This is particularly with regard to approval from Bursa on the right of key shareholders to vote for the proposed merger,” says Ong.

Mega Islamic bank

On a proforma basis, the new mega Islamic Bank will have a total asset size of RM126.8bil post merger. In terms of asset size, this will rank the new mega Islamic Bank second behind Maybank Islamic, followed by Bank Islam and Public Bank Islamic.

Ong said that on a proforma basis, the merged entity will raise the contribution from Malaysia and Singapore operations from 68% under CIMB Group to 79%.

Meanwhile, profit before tax from Malaysia and Singapore will be raised from 71% to 83%.

Elsewhere, Malaysia and Singapore Consumer Banking of CIMB will be raised from 44% to 51%. Upon completion of the deal, the enlarged Islamic bank may undertake a capital raising exercise to enhance its capital base for future growth.

The merged CIMB-RHBC would retain a controlling stake in the mega Islamic bank. There are no plans to list the mega Islamic bank at this stage.

Originally published on www.thestar.com.my