Malaysia's three-way bank deal is far from done

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HONG KONG (Oct 13): Malaysia's three-way $26 billion bank deal is far from done. A merger of CIMB Group with two smaller rivals will create the country's largest bank by assets. Yet current share prices point to hurdles, including potential opposition from an Abu Dhabi sovereign investor or even a counterbid. A Malaysian pension fund could seal the deal, but only if it is allowed to vote.

Under terms submitted for approval to the central bank, RHB Capital will issue shares to acquire the much larger CIMB. The latter's privately-held Islamic banking subsidiary will also acquire another listed bank, Malaysian Building Society, for new shares or cash. The two deals will happen simultaneously but are not dependent on each other.

RHB shares are currently trading 3 percent below the price implied by the merger terms. The small but significant discount points to hurdles that could still arise despite efforts to steamroll opposition by structuring part of it as a reverse-takeover.

As the acquiring entity, RHB only needs to gain the approval of 50 percent of its shareholders, compared with 75 percent for CIMB. That reduces the power of potentially disruptive RHB shareholders like Aabar. The Abu Dhabi sovereign investor owns a 21.2 percent stake in RHB, according to Eikon, which it acquired in 2011 for 10.8 Malaysian ringgit per share - a premium to the market price at the time. Aabar's arrival scuppered a possible takeover of RHB by CIMB or the much larger Malayan Banking (Maybank). The latter may still be keen on a deal.

A key factor in the latest three-way merger will be whether Malaysia's state-backed Employees Provident Fund is allowed to vote, according to two people familiar with the situation. As a large investor in all three banks, the EPF would not normally be allowed to participate. If it is excluded, Aabar will hold 36.3 percent of the RHB shares that are eligible to vote.

Another reason for caution is that the banks still need to complete due diligence, sign a definitive agreement, and spell out what synergies a combination can bring to prove that bigger is better. Malaysia's mega-bank deal may be presented as done but investors still need to have their say.

CONTEXT NEWS

- Malaysia's CIMB Group, RHB Capital, and Malaysia Building Society (MBSB) announced on Oct. 9 an agreement to combine in a deal that would create the country's biggest bank by assets.

- The three banks which have a current combined market capitalisation of 86.1 billion Malaysian ringgit ($26.4 billion) said they have submitted a proposal for the combination to the country's central bank.

- Under the two-part proposal, RHB will issue new shares to buy its larger rival CIMB. One RHB share will be swapped for 1.38 CIMB shares.

- That values CIMB at 7.267 ringgit per share or a 0.4 percent premium to the closing price on July 9, the day before the three announced they were in talks.

- CIMB's Islamic subsidiary will also acquire Malaysia Building Society at a price of 2.82 ringgit per share or a 20.5 percent premium to the undisturbed value. Shareholders in MBSB have the option to receive new shares or cash.

- A definitive agreement is expected to be signed in early 2015, subject to due diligence, and the deal is expected to be close in mid-2015.

- Abu Dhabi's sovereign fund Aabar owns 21.22 percent of RHB, according to Eikon.

- On the morning of Oct. 13, CIMB shares were each trading at 6.70 ringgit, RHB was trading at 8.94 ringgit, and MBSB was trading at 2.64 ringgit.