This article first appeared in The Edge Malaysia Weekly on November 4, 2019 - November 10, 2019

AL Rajhi Banking & Investment Corp (M) Bhd’s (Al Rajhi Malaysia) planned acquisition of Malaysian Industrial Development Finance Bhd (MIDF) is to be effected entirely through a share swap and values the latter at about RM1.7 billion, sources say.

“Based on the proposal they submitted to the central bank, it’s a share swap that will see each valued at one time their book value, after small adjustments,” a source familiar with the deal tells The Edge.

MIDF’s shareholder funds stood at roughly RM1.7 billion as at the end of last year, while Al Rajhi Malaysia’s amounted to RM725.49 million.

It is understood that Permodalan Nasional Bhd, which wholly owns MIDF, will end up with a 70% stake in the enlarged entity. The balance will be held by Al Rajhi Malaysia’s owner, Saudi Arabia-based Al Rajhi Bank, the world’s largest Islamic lender by assets.

The two parties, which first started negotiating a merger in early January, finally submitted their proposal to Bank Negara Malaysia on Sept 25. They are currently awaiting the central bank’s nod.

“It’s under Bank Negara’s review now,” the source adds. Both parties are hoping to conclude the exercise by the end of the year.

The deal was structured such that Al Rajhi Malaysia, the bigger of the two entities in terms of assets and the one with the Islamic banking licence, would be the acquirer.

According to sources, Al Rajhi Malaysia will not be acquiring all of MIDF’s businesses. A small portion of non-performing loans as well as some minor assets that cannot be converted to Islamic — such as the money-broking business — will be excluded from the deal.

“Basically, the acquisition focuses on MIDF’s main businesses [from which] it derives the bulk of its revenue — investment banking, asset management, development finance,” says a source.

MIDF has a minority stake in Amanah Butler Malaysia Sdn Bhd, its money-broking company. The majority is held by ICAP Group, a London Stock Exchange-listed entity.

There are currently 16 Islamic banks in Malaysia, making it a highly competitive industry.

A merger of MIDF and Al Rajhi Malaysia, neither of which is a public listed company, would result in combined assets of RM13.43 billion — still small compared with Bank Islam Malaysia Bhd, the country’s largest standalone Islamic bank (RM64.24 billion), and Maybank Islamic Bhd (RM229.42 billion), the largest Islamic lender.

Nevertheless, the merger is complementary to both financial institutions from a business perspective.

MIDF, a development financial institution that does some Islamic banking but cannot collect deposits, is keen on the merger to gain Al Rajhi Malaysia’s Islamic banking licence.

Al Rajhi Malaysia has commercial and retail banking as well as wealth management operations, which MIDF does not have, while MIDF has investment banking and stockbroking and research operations that Al Rajhi Malaysia does not have.

Hence, duplication and redundancies are not expected to be a big issue in the merger.

“Al Rajhi Malaysia’s strength is in commercial banking, with a focus on mid-to-large-sized companies, which MIDF’s investment banking arm can leverage. From an investment banking perspective, the large companies are covered by the big boys like Maybank Investment Bank and CIMB Investment Bank, but in terms of volume and number of transactions done, there are probably more opportunities in the mid-cap space … things like initial public offerings, rights issues and small mergers and acquisitions,” says an industry source.

Al Rajhi Malaysia made a net profit of RM11.73 million in the year ended Dec 31, 2018 (FY2018), an 8.1% increase from the year before. In 1H2019, net profit stood at RM7.15 million, a 43.4% drop from a year earlier. It had total assets of RM7.19 billion and a gross financing book of RM4.83 billion, with the bulk of it (67%) comprising corporate financing, followed by home and personal financing.

As for MIDF, it slipped into a net loss of RM67.27 million in FY2018 compared with a net profit of RM50.14 million a year earlier. Impairment losses made on loans, advances and financing that year stood at RM111.89 million compared with a writeback of RM7.67 million in FY2017.

The group reported a 1QFY2019 net profit of RM12.11 million, slightly higher than the RM11.19 million it made in 1QFY2018.

Banking mergers have been few and far between over the last decade in Malaysia.

The last merger was that of Malaysia Building Society Bhd and Asian Finance Bank Bhd in February last year. Prior to that, Hong Leong Bank Bhd acquired EON Capital Bhd in a protracted takeover that was completed in May 2011.

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