AFFIN Holdings Bhd’s plan for Japan’s Daiwa Securities Group Inc to acquire a minority stake in its investment bank, Affin Hwang Investment Bank Bhd (Affin Hwang IB), has fallen through, 20 months after talks were first initiated.

Affin said last week that the parties were “unable” to conclude the negotiations in accordance with the terms and conditions set by Bank Negara Malaysia — in its approval letter dated Oct 24, 2016 for their proposal that was submitted eight months earlier — within the stipulated deadline of Dec 31, 2016.

“Accordingly, the approval granted by Bank Negara has lapsed,” Affin said in a stock exchange filing on Jan 3.

Since then, there has been market speculation that Affin might make an application to the central bank to extend the deadline.

However, sources familiar with the situation say that will not be the case. Had the parties wanted to apply for an extension of time, they would have needed to do so before the central bank’s conditional approval for the deal lapsed.

“For all intents and purposes, this deal is dead and buried,” one of the sources tells The Edge.

The sources, however, indicate that Affin Hwang IB and Daiwa are working on some other arrangement related to investment banking, which could be put in place by February.

While there is some frustration and disappointment on Affin Hwang IB’s side over the aborted deal — Daiwa would have given it a leg-up in the highly-competitive world of investment banking and potentially helped it expand regionally — industry sources say there is a silver lining.

Not having Daiwa in the picture helps Affin Hwang IB avoid any shareholder-related complications that could potentially have emerged from its asset management (AM) business, which is a major contributor to its profits. This is because the AM business, Affin Hwang Asset Management Bhd, is 30%- owned by another Japanese investor, Nikko Asset Management Asia, a subsidiary of Nikko Asset Management Co Ltd. It has been an investor for over five years now.

Given that Nikko and Daiwa are fierce rivals in Japan, it is likely that there would have been complications had Daiwa become a strategic shareholder in Affin Hwang IB.

It is understood that Daiwa had sought an equity stake of about 26% in Affin Hwang IB, which would make it a strategic minority shareholder. Sources say the Affin-Daiwa deal fell through because Bank Negara had concerns over the rights that Daiwa would have been entitled to as a significant minority shareholder. The conditions that the central bank had set in its approval letter dated last October were in relation to this.

“Under the Companies Act 1965, with that kind of shareholding, you’d automatically become entitled to certain protections, which can be quite far-reaching. The strategic shareholder could challenge certain decisions, for example,” says a legal source.

Concerns about the rights of strategic ­minority foreign investors may stem from past experiences. Recall that RHB Bank Bhd’s Middle Eastern shareholder, Aabar Investments PJS, has proven to be a significant swing factor in the bank’s corporate developments in recent years. With its strategic 21.2% stake, Aabar was the key reason a proposed mega merger of RHB, CIMB Group and Malaysia Building Society Bhd, which would have created the country’s largest banking group, was aborted early 2015. (Its stake has since come down to 17.69%.)

In the first nine months of FY2016, Affin Hwang IB made a net profit of RM67.2 million, an increase over the RM43.7 million it made in the same period a year ago.

The AM business accounted for RM45.6 million of Affin Hwang IB’s profit before tax of RM90.9 million, while the investment bank business contributed around the same, or RM45.3 million.

A banking analyst that tracks Affin says the aborted deal has a neutral impact on the group.

“I don’t think investors had priced in a lot of upside from this deal, given that there was no immediate value that Daiwa would have brought to the table with capital markets being soft. Had the deal panned out, it would have been neutral-to-slightly-positive for Affin as it would have a strong partner that could bring in capital,” the analyst tells The Edge.

Affin’s shares gained three sen to close at RM2.40 last Wednesday, the day it announced the deal was off. It ended last week slightly lower at RM2.39.

Interestingly, this is the second deal in less than three months to have fallen through in the banking sector. On Nov 4 last year, Hong Leong Financial Group Bhd said it could not reach an acceptable commercial agreement with Bank Negara-approved negotiating parties for the divestment of Hong Leong Assurance Bhd and Hong Leong MSIG Takaful Bhd.

In its March 14, 2016 issue, The Edge reported that Affin Hwang IB was valued at a healthy price-to-book (PB) multiple of between 1.45 and 1.6 times under the proposed deal. This compares with the PB multiple of 1.28 times that Affin was subject to when it acquired HwangDBS Investment Bank — which now forms part of Affin Hwang IB — in 2014.

The high premium Daiwa was willing to pay for a minority stake, in what was to be an all-cash deal, suggests that it had larger plans for Affin Hwang IB. Daiwa has been looking to acquire minority stakes in brokerage firms in Asia to generate more income from abroad.

“Although this outcome is clearly disappointing for both Affin and Daiwa, both of our groups have committed to continuing our efforts to build upon the strong relationship that we have developed since first entering into a business alliance in December 2013, and our companies will continue to work closely with one another on other collaboration opportunities,” Affin said in an internal circular sighted by The Edge.

Affin, controlled by Lembaga Tabung Angkatan Tentera, has long had a history of partnering foreign companies for its entities.  Affin itself is 23.5%-owned by Bank of East Asia Ltd from Hong Kong.

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