KUALA LUMPUR: The proposed mega merger of CIMB Group Holdings Bhd (fundamental score: 1.35; valuation score: 2.1), RHB Capital Bhd (RHBCap) (fundamental: 1.5; valuation: 2.1) and Malaysia Building Society Bhd (MBSB) (fundamental: 1.2; valuation: 1.6) has been called off, the three companies announced yesterday, confirming The Edge Financial Daily’s report on Tuesday.

CIMB, in a letter, informed the other two banking groups yesterday that it had decided to abort the merger in light of the current economic conditions.

“We had thoroughly deliberated the merger, and while we remain convinced that the combination of our three franchises follows sound strategic logic, we ultimately were not able to arrive at a value-creating transaction for all stakeholders. The decision to cease discussions was arrived at after a detailed review of potential synergies that could be realistically delivered, especially in the current economic environment,” CIMB’s acting group chief executive, Tengku Datuk Zafrul Aziz, said in a joint statement yesterday.

Accordingly, the three parties have ceased discussions.

This comes six months after the proposed merger, which would have created the country’s largest banking group and a mega Islamic bank, was first announced in July 2014.

CIMB and RHBCap said they had withdrawn a joint application to Bank Negara Malaysia to seek approval for the merger.

The three parties have also terminated the exclusivity agreement that they had entered into. This means, other parties that are speculated to be keen on exploring a merger with RHBCap, such as Malayan Banking Bhd, can now approach the former if they want to.

CIMB, in an internal memo to its staff on the aborted deal yesterday, said following the detailed discussions over the last few months and the shift in the economic outlook, the group had concluded that its ability to realise targeted merger synergies would be impacted. As such, it said there was no longer a compelling case for the merger to proceed.

“When the merger was first proposed last year, we had made certain assumptions based on the economic conditions and outlook that were reflective of the environment at that point in time.

“However, many of these assumptions needed to be revisited, with the major changes in economic environment, such as the significant change in oil prices and currency exchange rates, as well as the challenging outlook for the financial services industry,” Tengku Zafrul said in the memo that was viewed by The Edge Financial Daily.

He went on to say that while he was “disappointed” that the merger would not be realised CIMB would move on with its own plans as it had not pinned all its hopes on the merger.

“In fact, we have been working very hard behind the scenes on our new mid-term strategy and roadmap to 2018, since we announced the strategic review last year. Now that the merger is no longer proceeding, we are ready to start implementing our strategic plans,” he said, adding that its strategy would involve key focus areas such as culture, productivity, transaction banking, Islamic banking and small and medium enterprises.

RHBCap group managing director Kellee Kam in a separate internal memo to staff said while the prospect of creating the country’s largest banking group was exciting, the changing economic environment and market conditions had created “significant challenges” for the group to be able to realise synergies.

The group would not have been able to deliver a value-enhancing proposal to stakeholders, he said.

“Part of the decision to terminate the discussions was also premised on the strong standalone proposition the RHB group brings to the table,” he said.

He said the group would now refocus its energy on accelerating its five-year transformation plan, known as Ignite 2017.

As for MBSB, it is understood that the non-bank lender will now continue with its efforts to become a bank. Its president and CEO Datuk Ahmad Zaini Othman said the opportunity to be a part of a mega Islamic bank had been an exciting one.

“Given that the discussions have ceased, we can now continue to focus on the strength of our franchise and achieving the goals that we have originally set for ourselves,” he said in a statement.

The Edge Financial Daily on Tuesday reported that an announcement on the mega merger being called off was expected before the end of the week.

The Edge weekly had in its Jan 10 issue also reported that there was a strong possibility the merger could be called off due to several factors, including that the economic landscape had become more challenging compared to six months ago, making it a bad time to go into a merger of this size.

Another factor was that RHBCap was seeking a revision of the terms, having seen how substantially CIMB’s share price had fallen since the structure of the merger was first announced on Oct 9 last year.

The report cited sources as saying that instead of an all-share deal in its merger with CIMB, it now wanted a cash portion to be included, making a deal potentially more expensive for CIMB.

When met by reporters at an event early yesterday, CIMB chairman Datuk Seri Nazir Razak said there was no change to the terms of the proposed deal. He said the due diligence exercise conducted for the proposed merger had been completed, and that the three parties were validating the business case of the merger.

CIMB shares closed down 17 sen at RM5.75 yesterday. RHBCap shares eased 15 sen to RM7.65, while MBSB’s share price gained 10 sen to end the day at RM2.16.

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.

This article first appeared in The Edge Financial Daily, on January 15, 2015.