Aabar now in favour of mega merger

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IN another twist to the tale, The Edge has learnt that RHB Capital Bhd’s major shareholder, Aabar Investments PJS — once seen as a stumbling block to the mega merger of the group with CIMB Group Holdings Bhd and Malaysia Building Society Bhd (MBSB) — is now leaning towards voting in favour of the deal.

“The deal is on track to happen [should the minority shareholders vote for it]. Aabar is now leaning towards supporting it as they believe the ‘merger value’ [will be good],” a source close to the Abu Dhabi investor tells The Edge.

Industry observers are surprised by this latest revelation because it is well known that Aabar — with its 21.2% stake in RHB Cap — wants at least RM12 per share, an asking price nearly 20% more than the RM10.03 per share offered for RHB Cap.

It is not clear at this stage why Aabar may now be leaning towards supporting the merger, but sources say there have been top-level government to government discussions.

The mega merger would provide the merged entity the scale for it to emerge as one of the top five banks in Asean. Additionally, the merger will improve regional presence for the parties involved — CIMB would benefit from RHB Cap’s larger presence in Singapore, while the latter would have an immediate presence in Indonesia and other Asean markets through the former.

The estimated run-rate synergies of the merger of CIMB, RHB Cap and MBSB could be as high as RM1.2 billion a year, sources familiar with the matter tell The Edge.

Last month, The Edge had reported, quoting a source who had seen the proposal documents, that over 80% of the synergies would be from cost savings while the remaining would be a mix of other savings that include revenue funding.

Meanwhile, after meeting last Tuesday, Bursa Malaysia rejected the applications of both RHB Cap and MBSB for their common major shareholder, the Employees Provident Fund (EPF), to vote on the mega merger.

The Edge had reported on Oct 20 that Bursa would be meeting to decide on the application, and theedgemarkets.com had then reported that the bourse was expected to disallow the EPF from voting in the proposed merger.

In arriving at its decision, Bursa said it took into consideration several factors, including the fact that the EPF had prior knowledge of the proposed merger, as it was notified by CIMB before the issuance of the latter’s letter of intent, dated July 9, 2014.

“By virtue of the EPF being the common major shareholder in all three affected companies (MBSB, RHB Cap and CIMB) as well as being the single largest shareholder of both MBSB and RHB Cap, there exists such a potential conflict of interest situation, where the EPF may be able to influence the proposed merger to its own benefit,” the Bursa noted in an announcement on Oct 21.

“As the single largest shareholder of MBSB and RHB Cap and a major shareholder in CIMB, the EPF may benefit from the transaction as a shareholder of RHB Cap and/or CIMB. As such, its overall position would differ from a party who is merely a shareholder of MBSB, especially given the differing terms and valuations applicable to these three affected companies,” it added.

The EPF is the single largest shareholder of RHB Cap and MBSB with 41.5% and 64.6% stakes, respectively. It also holds 14.6% of CIMB.

“These are [objective] reasons why the EPF cannot vote on the merger and these issues will not change even if it now sells down in any of the three banking groups. For example, the fact that the EPF had prior knowledge of the proposed merger is one reason why Bursa is not allowing it to vote, [and its decision] will not change even if the EPF sells down its stake in CIMB,” says a senior banking analyst.

Accounting of goodwill

Meanwhile, while the structure of the merger between RHB Cap and CIMB will see the smaller bank acquiring the larger bank, analysts say the accounting treatment will be the reverse.

“Both banks have been putting across the message that although the structure is that of RHB Cap acquiring CIMB, the accounting treatment of it (the deal) should reflect CIMB acquiring RHB Cap and therefore only the goodwill of RHB Cap will be accounted for, as opposed to a goodwill [valuation] for CIMB, which is larger and would erode ROE (return on equity),” says a banking analyst.

“RHB Cap acquiring CIMB would be more dilutive of ROE rather than the other way around whereby the actual impact will be more muted,” adds the analyst.

Banking analysts generally expect ROE for the merged entity to decline to 11% from 12% if the accounting treatment is adopted from the point of view of CIMB acquiring RHB Cap. However, the potential dilution if it is accounted for from the perspective of RHB Cap acquiring CIMB would see ROE decline to lower than 10%. Maybank Investment Bank Research estimates that the goodwill created from the merger of RHB Cap and MBSB will amount to about RM11.6 billion.

“A higher goodwill will also have an impact on capital, by causing capital ratios to be lower should CIMB’s goodwill be taken into account. But in this case, the banks are saying that they will be accounting for RHB Cap’s goodwill, which is the lower valuation, and therefore this will have a smaller impact on the merged capital,” notes another banking analyst.

A partner at a Big Four accounting firm says that IFRS 3 Business Combinations (guiding principles issued by International Financial Reporting Standards) outlines the accounting treatment when an acquirer obtains control of a business. “The old accounting view was that in a reverse takeover, where A buys B but B has control of A, B can fair value its assets and make a killing from it. As such, the business combination standard has been changed to close this kind of loophole. This means that we now not only look at the structure of the deal and who the acquirer is, but also take into account what happens after the acquisition — who has control of the merged entity and is ‘deemed the acquirer’,” he explains.

“So in this case, RHB Cap may buy CIMB but if, for example, CIMB has management control, then CIMB’s assets would not be fair valued and the goodwill will be based on the price of RHB Cap minus the fair value of RHB Cap’s assets,” he adds.

The proposed structure of the deal by which RHB Cap will acquire the assets and liabilities of CIMB are contrary to the widely held expectation that the bigger bank, CIMB, would be the acquiring party.

The Edge Financial Daily had reported on Aug 22 that the merger route being considered was for CIMB to sell its entire banking business to RHB Cap and the sale would be funded by an issuance of new RHB Cap shares.

As the buyer of the assets and liabilities of another banking group, RHB Cap only needs a 50%+1 share for the deal to be approved, compared with the selling party that would need a 75% vote.

This article first appeared in The Edge Malaysia Weekly, on October 27 - November 2, 2014.