SEVERAL FACTORS that are coming together point to a strong possibility that the proposed banking mega merger of CIMB Group Holdings Bhd, RHB Capital Bhd and Malaysia Building Society Bhd (MBSB) could be called off, sources familiar with the deal say.
“The economic landscape today is so different from what it was when the merger was first announced in July last year. Circumstances have changed so much that it has come to a point where the merger may not be palatable for the parties involved. They are currently accessing the situation,” says a source.
Two separate sources say there is a “strong chance” the merger won’t happen based on current indications from key parties. One of the reasons is that RHB is seeking a revision of the terms, having seen how substantially CIMB’s share price has fallen since the merger was first proposed last July.
“Instead of an all-share deal, RHB now wants shares and cash for its merger with CIMB. This means CIMB has to put up more cash and valuations will go up, so the deal may no longer be feasible to CIMB,” one of the sources tells The Edge.
Added to that is the fact that the economic situation, both at home and the region, has turned more challenging since the merger was proposed, the source adds. CIMB, the more regional player of the three, has seen its financial performance suffer the most in recent quarters, mainly because of the tougher operating landscape in Indonesia.
“Given the economic situation, the depreciating ringgit and problems in Indonesia, the dynamics are now such that it’s just a bad time to go into a merger, especially one where the pricing is not that cheap,” the source remarks.
In mid-December 2014, The Edge, citing sources, reported that the due diligence undertaken for the merger had showed up provisioning issues that could also affect valuations. The sources had pointed out that MBSB did not come within the purview of Bank Negara Malaysia up until the Financial Services Act was enforced in 2013 and as such, the non-bank lender applied a different provisioning standard for many years from the two other banking groups involved in the merger.
Meanwhile, another source familiar with the deal says given the current operating landscape, the merger is unlikely to achieve the desired synergies, estimated at over RM1 billion.
“When the modelling was done for the proposed merger, it was done based on certain assumptions but the market has changed so much since then. For example, the aspired revenue that the merger wants to achieve is looking tough to achieve now given the current operating landscape. Loans growth has gone down, margin compression is worse than the industry thought and asset quality could be worse than what the industry expects,” says the source.
“From the cost synergies point of view, think about it, how many people would take up a VSS (voluntary separation scheme) in this current market environment? Surely people will think twice before accepting it. In a normal market environment, the take-up rate of a VSS is about 60% to 70% … but would that rate be the same in the current environment?” the source adds.
On top of these factors, there is also the falling stock price of CIMB. The Edge had on Nov 3 written that if the divergence in share prices were to continue, it could lead to a recalibration of the relative values of the three entities.
CIMB’s stock has shed 24.2% to RM5.29 last Thursday since the structure of the mega merger was first announced on Oct 9. RHB’s has fallen 13.7% to RM7.51 over the same period, while MBSB’s has risen 3.8% to RM2.46.
Last Thursday, Bloomberg reported, citing sources, that the terms of the merger between CIMB and RHB could be renegotiated following the tumble in CIMB’s share price.
Industry observers say should the merger plans fall through, an alternative potential buyer could emerge for RHB. “RHB did catch the eye of a few potential suitors, including Maybank. So if the merger is off the table, it is possible that others may make a move on it,” says an industry observer.
According to another source, long-talked-about plans for a merger between RHB and MBSB may be re-explored. “The parties may rope in a smaller Islamic outfit into the mix,” the person says.
As it stands, the proposed CIMB-RHB-MBSB merger has been structured such that RHB will acquire CIMB’s assets and liabilities via a share swap at an exchange ratio of 1.38 (one RHB share for every 1.38 CIMB share). This is based on a benchmark price of RM7.27 per CIMB share and RM10.03 per RHB share, translating into a price-to-book value (P/BV) ratio of 1.7 times and 1.44 times for CIMB and RHB respectively.
Their Islamic operations, which will then come under CIMB Islamic Bank, will then acquire MBSB to form a mega Islamic bank, at a price of RM7.77 billion or RM2.82 per share. This translates into a P/BV of 1.32 times and MBSB shareholders have a choice to either accept cash or new shares in the unlisted CIMB Islamic group.
This article first appeared in The Edge Malaysia Weekly, on January 12 - 18 , 2015.
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