Merger valuations seem fair, but will Aabar accept?

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VALUATIONS in the proposed mega bank merger of CIMB Group Holdings Bhd, RHB Capital Bhd and Malaysia Building Society Bhd (MBSB) were more or less in line with expectations. But the question is, will RHB’s Middle Eastern investor find it compelling enough to accept?

Aabar Investments PJS, with its 21.2% stake in RHB, could scuttle the merger should Bursa Malaysia rule the three parties’ common major shareholder — the Employees Provident Fund (EPF) — cannot vote on the deal on account of the move being deemed a conflict of interest.

The deal has been structured such that RHB will be the acquiring entity. It will acquire larger rival CIMB’s assets and liabilities via a share swap at an exchange ratio of 1.38 — meaning that CIMB shareholders will get one RHBCap share for every 1.38 CIMB shares they hold.

As the acquirer, RHB only needs a 50%-plus-one-share approval for the deal to go through. If it were the selling party, it would have needed a 75% vote. Under the proposed structure, if the EPF is allowed to vote with its 41.5% stake in RHB — and if it is for the deal — the merger will be pretty much in the bag.

However, if Bursa rules that the EPF must abstain from voting, then Aabar will hold a 36.2% vote, which means that if it votes against a deal, it will be tougher  —  though not impossible — for the merger to go through.

Apart from Aabar, RHB has another substantial shareholder, OSK Holdings Bhd, with a 9.9% stake (but a 16.9% vote if EPF were out of the picture). The rest of RHB’s shareholders are minorities that include investment funds like Skim Amanah Saham Bumiputera and Kumpulan Wang Persaraan that collectively own the remaining 27.4% stake and have a 46.8% vote without the EPF.

“If OSK is agreeable to the deal, all that is needed is most of the minority votes, then the merger can go through even without the EPF vote,” says a source.

While there’s no telling which way Aabar will vote, it is no secret that it has been seeking a high price of RM12 a share for its stake in RHB — much higher than the RM10.03 RHB was valued at in this deal.

Aabar acquired the shares at RM10.80 each in 2011 from its sister company Abu Dhabi Commercial Bank, a left-to-right-hand transaction, which inevitably set a high ‘floor’ price for any potential merger transactions. RHB’s share price, however, has yet to cross the RM10 level in over five years.

“I guess it’ll come down to how well the management can present the case for merger synergies. If they can show it’s value accretive, then most shareholders will approve,” says a banking analyst.

A source from Bursa told The Edge Financial Daily last Thursday that it cannot make a decision on the EPF’s voting ability until the boards of MBSB and RHB make a stand on whether or not they think the EPF should vote.

It should be pointed out that although RHB is the acquirer in this merger exercise, from an accounting and eventual ownership perspective, it is actually CIMB that is deemed the acquirer. Its shareholders will eventually hold 70% of the CIMB-RHB conventional banking group, with RHB’s shareholders owning 30%.

This underscores the fact that CIMB is the driving force behind the whole mega merger. The enlarged group, together with MBSB, would end up becoming the fourth largest by assets in Asean, behind Singapore’s DBS Group, Oversea-Chinese Banking Corp and United Overseas Bank.

Observers note that if RHB’s minority shareholders and Aabar were to hold out for better valuation, the risk they face is that CIMB may walk away and then RHB’s share price — inflated in recent times because of the M&A premium attached to them — sinks back to old levels. Since the beginning of the year until  July 9 (start of merger talks), RHB’s shares traded at an average of RM8.74.

If the deal goes through, the single biggest shareholders in the enlarged CIMB-RHB entity would be EPF (22.6%), Khazanah Nasional Bhd (20.5%), Mitsubishi-UFJ (6.4%), Aabar (6.3%) and OSK (3%).

Meanwhile, after the CIMB-RHB merger, the next step will see their respective Islamic banks — CIMB Islamic and RHB Islamic — merging with MBSB to form a mega Islamic bank. This will involve RHBCap’s Islamic banking business being sold to CIMB Islamic Bank Bhd, which will then acquire all of MBSB’s assets and liabilities at a price of RM2.82 per MBSB share.

MBSB shareholders will have the option of receiving cash or shares in CIMB Islamic, the newly-created mega Islamic bank. MBSB will eventually be delisted from the Main Market of Bursa Malaysia.

The expectation is that the merged CIMB-RHBCap entity would retain a controlling stake in the mega Islamic bank following a potential capital-raising exercise to boost the latter’s capital base for future growth.

Non-bank lender MBSB was accorded the highest valuation of the three entities in the merger. “The reality is that MBSB’s ROE, at about 20%, is the highest of the three entities, so you can justify the high valuation,” observes a banking analyst.

MBSB was valued at 1.93 times price-to-book as at end-June, while CIMB was valued at 1.7 times based on a benchmark price of  RM7.27, and RHB at 1.44 times based on a benchmark price of RM10.03.

All three were valued at a premium to their share price on July 9. In CIMB’s case, the merger consideration represents a premium of 0.4% to the July 9 price of RM7.24, while RHB’s is a 15% premium to RM8.72, and MBSB’s a 20.5% premium to RM2.34.

The clear winner in the deal are shareholders of MBSB, whose shares jumped about 11%  or 26 sen to close at RM2.63 — a 14-month high — and off an intra-day high of RM2.65 on Friday, the day after the merger details were announced.

RHB’s shares closed 2.1% or 18 sen higher to RM8.88, off an intra-day high of RM9.05. CIMB’s shares, however, shed 4.6% or 32sen to RM6.66, its lowest close in about eight months.

“We believe that the deal is positive for MBSB and RHB (which we are upgrading to ‘buy’ from ‘hold’, with a raised target price of RM10.40 from RM8.70), positive for OSK Holdings and neutral on CIMB (‘hold’) shareholders. Overall, we believe it is a  decent merger proposal that will eventually be positive to the enlarged entity,” says  Desmond Ch’ng, a banking analyst from Maybank Investment Bank Research.

He estimates a post-merger dilution in CIMB’s FY2015 ROE to 11.4% from 12.3% previously.

Several analysts contacted by The Edge feel the merger valuations are decent.

“RHB’s is at a slightly bigger premium than expected, but it’s not unreasonable  at 1.4 times book value ... I would have preferred it at say, 1.3 times. As for MBSB, the valuation surprised on the upside but I think it’s justified because the exercise is an outright privatisation, so it has to be attractive enough to get minority shareholders to accept. So, overall, I think valuations for all three are quite fair,” one of them says.

The same analyst points out that the valuations are also “more or less” in line with that of past mergers and acquisitions (M&A). The last M&A involving commercial banks was Hong Leong Bank Bhd’s acquisition of EON Capital Bhd in 2011 for RM5.06 billion,  or at 1.4 times price to book.

“But you can’t really compare this transaction with past ones because valuations have to be benchmarked to ROEs at that point in time. At that time, the average price-to-book was 1.8 times,” he notes.

Maybank IB’s Ch’ng highlights that one of his key reservations about the deal is the fact that it will take time for synergies to kick in. As the deal is only expected to be completed by the first half of next year, integration costs will feature only in 2016.

“Cost synergies make up 86% of the total estimated synergies and these will take time to realise, as would the potential disposal of some of the units, for example,  RHB Insurance, RHB Investment Bank and a 40% stake in RHB Asset Management. As such, it could only be in 2017 when the group enjoys full benefits from its integration,” he says.

This article first appeared in The Edge Malaysia Weekly, on October 13 - 19, 2014.