IT IS difficult to ignore the differences in the stock performance of the three financial groups involved in the mega merger.

The sharp decline in the stock price of CIMB Group Holdings Bhd compared with RHB Capital Bhd and Malaysia Building Society Bhd (MBSB) since the announcement of the merger begs the question: if the divergence in share prices continues, could it lead to a recalibration of the relative values of the three banks for the merger deal?

Prior to the announcement of the structure of the mega merger on Oct 9, when it was officially revealed that RHB Cap would be buying the assets and liabilities of CIMB, the share price of CIMB had been on a downward trend, while RHB Cap and MBSB saw their stocks rise.

CIMB’s share price closed at RM6.98 on Oct 8 and it has since nosedived 11.6% over a 2½-week period to a one-year closing low of RM6.17 on Oct 27. It recovered to close at RM6.50 on Oct 30.

Meanwhile, RHB Cap’s share price, which closed at RM8.70 on Oct 8, rose to RM8.77 on Oct 30. MBSB closed at RM2.37 on Oct 8, and ended at RM2.61 on Oct 30.

Interestingly, the sharp movement in its stock price during this period had caused CIMB’s market capitalisation relative to the merged entity to drop to 70.8% as at Oct 30, compared with 72.4% on Oct 8.

Meanwhile, RHB Cap’s market capitalisation vis-à-vis the merged entity increased to 29.2% from 27.6% in the same period. While there is a shift in the ratios, the total market capitalisation of the merged entity is about the same for the period.

Given that the proposals are now being put together for the consideration of shareholders at the coming EGM, is the change in valuation significant enough to fbe factored into the merger deal?

If it is, it could be positive for shareholders of RHB, which include Aabar Investments PJS.

However, banking analysts say a change in valuations is unlikely.

“Yes, the stock prices of the banks have deviated from the valuation offered but I don’t think they will change the offer if the ratios are not that far apart. There are investors watching the stocks and would arbitrage either way, and that could help maintain the ratio,” says an analyst. He adds that CIMB had a closed-door meeting with analysts on Tuesday.

CIMB’s stock price clawed back some ground to RM6.50 on Thursday, from its one-year closing low of RM6.17 on Monday. On Friday, CIMB closed at RM6.49.

“CIMB management shared with analysts how they were going to realise the cost synergies. An integration cost of RM1.4 billion is huge. That is obviously a concern they are addressing. They also shared with analysts about the accounting of goodwill for the deal, where it would be RHB’s goodwill that will be accounted for,” the analyst says.

While the topic of recalibrating the relative values of the three banks emerges due to their recent stock performances, it should be noted that RHB Cap had already been given a premium in the proposed share swap.

According to sources familiar with the matter, the ratios were calculated based on a number of factors that include the composite of market prices and price to book value. “Therefore, despite the price decline of CIMB relative to RHB, it does not necessarily imply that the relative share exchange ratios should be changed,” says a source.

The proposed acquisition of CIMB’s assets and liabilities by RHB Cap is at a share swap ratio of one RHB Cap share to 1.38 CIMB shares. RHB Cap shares are valued at RM10.03, while CIMB shares are valued at RM7.27. The proposed offer values RHB Cap at 1.4 times price to book of June 14 and 1.7 times for CIMB.

 What is interesting, industry observers and analysts say, is that CIMB’s share price has fallen relative to RHB Cap, which is contrary to the norm in takeover deals, where it is the acquirer — in this case, RHB Cap — that should see a fall in its stock price.

So why did CIMB’s stock fall?

There are mixed views on this. Some analysts say it is likely specific to CIMB and not a result of the merger proposal. “CIMB Niaga’s results were disappointing and CIMB Group’s recent June quarter results were not that great as well,” says a banking analyst.

CIMB’s 97.94%-owned Indonesian unit PT Bank CIMB Niaga Tbk’s net profit for the first nine months ended Sept 30, 2014 fell  28.5% to IDR2.3 trillion (RM628.2 million) from IDR3.21 trillion a year ago mainly due to higher interest expense and provisions.

UOB Kay Hian Research on Oct 29 noted that the ROE of CIMB Group remains under pressure and the potential merger adds to the overhang. “Given the persistent challenges of NPL (non-performing loans) and the overall growth outlook in Indonesia, it would be increasingly challenging for the group to meet its 13.5-14.0% ROE target. With this rather bleak outlook in Indonesia, moderating consumer loans growth in Malaysia and lacklustre capital market activities impacting overall income growth, the group’s ROE is likely to settle closer to the 12.5% level in 2014,” it states.

Another analyst points out that while RHB Cap is acquiring the assets and liabilities of CIMB, the market views CIMB as the “deemed acquirer” in this merger.

Meanwhile, EPF CEO Datuk Shahril Ridza Ridzuan told The Edge Financial Daily last week that the EPF will not pare down its stake in CIMB although Bursa Malaysia has disallowed it from voting on the merger of the three banks in which it holds substantial stakes.

“There is a lot of speculation in the market ... we will not change our investment strategy,” he said on the sidelines of the 10th World Islamic Economic Forum in Dubai when asked about talk of the EPF trimming its stake in CIMB to garner voting rights.

He also reiterated that there was no “real conflict of interest” for the EPF to vote on the merger involving CIMB, RHB Cap and MBSB.

In separate announcements to Bursa Malaysia last Friday, RHB Cap and MBSB said that upon the request of the EPF to both banks,  they have submitted separate appeal applications on Oct 31 with regard to Bursa’s decision on EPF’s voting rights in the merger.

This article first appeared in The Edge Malaysia Weekly, on November 3 - 9, 2014.

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