No agreement on bank merger in sight yet

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AS the Oct 8 deadline looms, there is still no sight of an agreement by the three financial institutions in talks to form the country’s biggest banking group and mega Islamic bank, sources say.

The 90-day exclusivity period for CIMB Group Holdings Bhd, RHB Capital Bhd and Malaysia Building Society Bhd (MBSB) to negotiate the mega merger and finalise the pricing and structure lapses next week on Oct 8.

“The deal is neither close to closing nor off the table. The deciding parties need to come to terms on pricing. There is still much discussion on it,” says a source close to the deal.

Asked if a draft proposal had been submitted to Bank Negara Malaysia as yet, another source involved in the merger points out that the parties have yet to come to an agreement. “We first need to come to an agreement on the proposal before we can submit anything to the regulator,” he says.

Yet another source says that as part of the original plan, the three parties had been targeting to submit their business plan to Bank Negara by Sept 8, a deadline now missed.

Interestingly, the parties had agreed to an automatic extension of the 90-day exclusivity period upon submissions being made to Bank Negara on the proposed merger.

Should the exclusivity period lapse, the parties would still be able to carry on discussions as Bank Negara has given them a six-month period from July 10 to hold merger talks.

Sources say RHB and MBSB both held board meetings last Thursday, during which several aspects of the merger were discussed.

Key concerns

A main concern is whether Bursa Malaysia will allow the Employees Provident Fund (EPF) to vote in the mega merger.

The EPF wants to be able to vote when the banks’ shareholders eventually have a merger proposal to decide on. However, certain listing rules prevent it from doing so as it is a substantial shareholder in all three parties.

The Edge previously reported that the EPF had written to RHB and MBSB, requesting them to apply to Bursa for a waiver from the listing rules so that it could vote.

According to sources, MBSB put the EPF’s request for a waiver in a letter to Bursa last Friday. RHB, meanwhile, is planning to send yet another such letter to Bursa after earlier attempts to get some clarity from the exchange on the matter failed.

“Bursa is very concerned about whether the EPF has any undue influence on the deal and whether it had prior knowledge of the deal. While the EPF itself claims it doesn’t, Bursa wants the board to have an opinion on that. The previous letters did not provide an opinion,” one of the sources says.

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

Sources say the current structure being discussed in the step-by-step merger involves RHB acquiring CIMB’s assets and liabilities in a share swap. This is contrary to popular belief that CIMB, the bigger of the two banks and the driver of the deal, is the acquirer.

The next step of the merger involves their respective Islamic banking subsidiaries being merged with MBSB, and CIMB Islamic Bank Bhd becoming the vehicle for the enlarged Islamic operations.

As the buyer of CIMB, RHB only needs a 50%+1 share approval for the deal compared with the selling party that needs 75% of the votes. This will prevent potential problems from Aabar Investments PJSC — which has a 21.2% stake in RHB — that could be the difficult party in the merger, given that it had bought the stake from a sister company in 2011 at a hefty RM10.80 a share. Its investment cost is understood to be even higher, at close to RM12 — which means that pricing will be a key hurdle in the merger. RHB’s share price has not crossed the RM10 level in over five years.

Aabar is working with Goldman Sachs to explore options for its stake in RHB, Bloomberg reported last Friday, quoting sources.

Meanwhile, a source says RHB is looking further into some of the risks associated with the merger. For example, the merger will also require the approval of Indonesian authorities, given that CIMB has substantial operations there via Bank CIMB Niaga.

Additionally, it is concerned that the merged Islamic entity may not have access to MBSB’s Angkatan Koperasi Kebangsaan Malaysia code — which allows the latter to directly deduct from the monthly salaries of civil servants — should the merger with MBSB not pan out.

“All this adds to the execution risks for RHB,” the source says.

Run-rate synergies

Meanwhile, the estimated run-rate synergies of the CIMB-RHB-MBSB merger could be as high as RM1.2 billion a year, sources familiar with the matter say.

“Over 80% of the synergies, however, is from cost savings. The rest is a mix of other savings, including revenue funding,” says a source who has seen the proposal documents.

What this means is that there could be a big cost rationalisation exercise post-merger but another source familiar with the merger discussions points out that this is where the Islamic mega bank makes sense and would help minimise job cuts. 

“In any domestic consolidation, a larger part of synergy is cost. What makes it different this time around is the mega Islamic bank. If MBSB isn’t there, but just CIMB and RHB, then a lot of people will be taken out post-merger, and branches will be closed because there will be a lot of duplication. But because there is the Islamic bank, that is what makes it potentially work. This is because the new mega Islamic bank would need branches of its own. So instead of retrenchment, they [extra staff] will be redeployed to this new entity,” he says.

The run-rate synergies of over RM1 billion are high by normal merger standards, says a senior banking analyst. “For an idea of how huge this figure is, RHB’s estimated annualised profit is about RM2.1 billion this year ... so if the merger can derive a synergy of RM1.2 billion a year, it is already half of RHB’s profit.”

The merger and acquisition of EON Capital Bhd and Hong Leong Bank Bhd brought about annualised synergies of RM200 million within the first year of the merger, according to the latter’s 2012 annual report. The banking group expects a total cost synergy of RM400 million in three years since the merger in 2011.

The HLBB-EON merger is the most recent banking M&A that took the asset and liability route with a 50% plus one shareholder vote. The M&A — which went down in history as the longest takeover of a bank in the country, taking 15 months to conclude — was done at RM5.06 billion, which translates into a valuation of 1.4 times price-to-book ratio.

This article first appeared in The Edge Malaysia Weekly, on September 29 - October 5, 2014.