KUALA LUMPUR: The market cheered on the aborted three-way mega merger between CIMB Group Holdings Bhd, RHB Capital Bhd (RHBCap) and Malaysia Building Society Bhd (MBSB) last week, sending share prices of CIMB and RHBCap higher as investors deemed the deal cancellation a prudent move amid a tougher economic environment.
However, it would be hard to imagine that tycoon Tan Sri Ong Leong Huat would be part of the cheering crowd.
Ong controls 41.08% of OSK Holdings Bhd (OSKH), which in turn owns 255.8 million shares or a 9.94% stake in RHBCap (fundamental: 1.5; valuation: 2.1) — valued at RM2.6 billion based on the RM10.028 per share that RHBCap was priced in the mega-merger with CIMB and MBSB.
The market had anticipated that OSKH (fundamental: 1.65; valuation: 1.2) would seek the opportunity to cash out from RHBCap once the mega merger is completed. The rationale being, as OSKH’s interests in RHBCap gets diluted in a much larger merged entity, it would be easier for it to unload all or a partial of its investments at a desirable price, said market observers.
OSKH’s cost for the RHBCap shares came up to RM7.36. The company has got the shares as main payment consideration for selling its investment banking unit to RHBCap for RM1.95 billion in 2012.
Such a huge war chest, should OSKH unload its investments in RHBCap, it would have come in handy for the group as it strives to build a larger business out of property development.
Indeed, Ong would have factored in the potential cashing out of RHBCap to raise capital for his bigger ambition in the real estate sector.
Just three months after the CIMB-RHBCap-MBSB deal was mooted in July 2014, Ong in October initiated a deal to merge OSKH with OSK Property Holdings Bhd and PJ Development Holdings Bhd (PJD) — two property outfits that he personally has stakes in.
The property exercise would see OSKH paying either cash or issuing new shares to OSK Property (fundamental: 2.3; valuation: 3) and PJD’s (fundamental: 2.6; valuation: 3) minority shareholders for their stakes, to form a large property development entity with a combined market capitalisation of over RM3.3 billion.
But now that the mega bank merger deal is off; all eyes will be on OSKH’s decision on its 9.94% stake in RHBCap.
According to industry sources, there is no holding period for OSKH and it has the option to let go of the RHBCap shares at any time.
“Ong might have some sort of verbal agreement to not sell everything in the open market. But other than that, there’s nothing to really hold him back if he wants to let it go,” one source told The Edge Financial Daily.
Nevertheless, pricing remains the key. Without an M&A exercise, it would be difficult for OSKH to unload such a substantial stake in RHBCap at a desirable price.
Unfortunately, another M&A exercise is unlikely to happen in the banking industry at this juncture, says a banker.
He pointed out that Malaysian banks were expensive, with the acquirer often having to pay a premium, with arguably mediocre returns.
“For a local bank to acquire another local bank to gain market share, what would be the point if there was no synergy? All you would see is a lot of overlap in many areas,” he said.
“Of course, there is always a possibility of a M&A in the sector, but at this point, if banks are really looking for a value-accretive deal, it’s better to look regionally. Acquiring banks outside Malaysia is much cheaper.”
In the mean time, OSKH would just have to contend itself with earning average dividends from its investment in RHBCap.
The Edge Research’s fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Go to www.theedgemarkets.com for more details on a company’s financial dashboard.
This article first appeared in The Edge Financial Daily, on January 19, 2015.