As it turned out, Malayan Banking Bhd and CIMB Group Holdings Bhd's battle to take over RHB Capital Bhd, led respectively by Wahid and Nazir, which had a three-month deadline for completion took merely three weeks to go belly up.
On Thursday, just one week before both banking giants' competing offers were scheduled to land on the table of RHB Cap directors, the banks revealed that they had scrapped talks and were bowing out of the merger plan. Their carefully-crafted statements to the stock exchange, this time around, did little to mask the disenchantment. Based on the expectations of key stakeholders “we do not believe that we will be able to arrive at a value creating merger ... we prefer not to prolong our discussions unnecessarily,” said Nazir.
Maybank's note, as terse as it was, was unusually revelatory; it said it was calling off the talks “in the light of recent developments.” Little guessing was needed to figure out what that was. Wahid elaborates on the “recent developments” to StarBizWeek: “... the recent transaction has set an expectation among certain shareholders on the valuation of RHB. We believe that a transaction that will benefit all stakeholders, including our own shareholders, may be challenging to achieve based on the price expectations that have been created.” On hindsight wisdom, it's near impossible to have two deals a sale of a strategic block and a wholesale acquisition involving the same entity, taking place almost concurrently without jeopardising someone's interest. Therein lay the writing on the wall.
From the glass half-full perspective, an astute corporate observer appears relieved: “I'm pleased that the parties have the discipline not to push ahead when good sense dictates they should stand down. What would be bad is inspite of all these (high) expectations, they went ahead. That would show indiscipline and lack of maturity and would have done injustice to Maybank or CIMB.”
“What would have been ideal is to exchange the shares at realistic prices and reap the gains in the uplift of share price after the merger,” he adds.
The strong arm of the regulator
Bank Negara's regulatory hand, guided by the overriding compass for industry consolidation, in the entire saga is hard to miss right from the start.
Without the central bank's blessings (or was it cajoling?), the two banking juggernauts may not have stepped up to the plate as fast as they did to start merger talks with RHB Cap. Their almost mirrored and closely-timed statements on receiving the regulator's nod to talk to RHB Cap board and its substantial shareholders somewhat reflect this.
Cementing this notion is the twin step late this week by both to bow out of the merger plans. “If one had walked out of submitting an offer while the other stayed, it would be easier to believe that the central bank had little to do with this. They were competing with each other for RHB Cap. But instead, both pulled out together, which is telling,” says an observer.
The merger idea was largely dictated by a single denominator the race for scale. Whichever way it swung (Maybank-RHB Cap or CIMB-RHB Cap), it could have created the largest banking group in the region in terms of market value, a clear market leader in Malaysia and bolster their overseas operations. The merged entity would have also cosied up even closer to three of Singapore's banking heavyweights, which have held the near-indomitable top three spots based on the assets in the region. Now, wouldn't that have been something to cheer about?
Even so, the potential grandeur was somewhat muffled by the murky synergistic benefits and potential substantial duplication issues which could arise from the merger with either one.
Credit Suisse in an earlier report had cited “substantial overlap resulting in excess staff and branches” as a key challenge in the potential merger. Given the upcoming general elections, which it said is likely in 2012, “we doubt authorities would agree to allow either bank to shed excess staff.”
In other words, not many were convinced by the cost synergies to be extracted from the union. It is for this very reason that OSK Research wasted no time (one day after Maybank and CIMB nixed the deal to be exact) to echo a rumour of AMMB entering the RHB Cap merger fray, given it's a better fit, hence a “marriage of equals.”
The local research house also expressed that it was not surprised by the turn of events: “This piece of news did not entirely come as a surprise given the fact that the proposed merger with RHB Capital was rumored to have been at the invitation of the central bank rather than initiated by CIMB or Maybank. As such, pricing and the rationale for a synergistic merger were key stumbling blocks from the start.”
While the central bank had steered the banking stalwarts towards a merger with RHB Cap, it was too late to stop Abu Dhabi Commercial Bank from divesting its 25% stake in the country's fifth largest bank, despite the potential red flags. Such concerns turned into grim reality over the week.
The harbinger
The cracks in the merger plans emerged following the RHB Cap stake sale by ADCB to another sovereign-owned agency Aabar Investment Agency PJSC on June 17. The harbinger of a doomed merger was the all-important determinant in the sale, as in any transaction the price tag. At RM10.80 a piece, the strategic block would change hands, from left to right that is, at 2.25 times the book value of RHB Capital.
“It wasn't so much about the price. Remember, this is a merger involving a share swap. CIMB could have been willing to pay RM10.80 per share for RHB Cap on a fully-valued basis. In return, it would also fully value its own shares at say, RM12. Why would it undervalue its own shares while fully valuing that of RHB Cap? This in turn, would determine the swap ratio. The problem is that RHB Cap shareholders were not warmed up to such a plan as their shareholding would be significantly diluted in the enlarged entity,” says an observer.
Still, determined not to allow the exercise to derail the consolidation agenda, Bank Negara slapped two conditions on the deal. Firstly, Aabar must support a merger with another Malaysian bank. But it was the other condition - that the sale price be adjusted accordingly if the merger offer price came in below - which had peeved not just the Middle Easteners but also the keeper of 12 million Malaysians' retirement savings and 45% owner of RHB Cap, the Employees Provident Fund (EPF).
“How can the central bank force non-market conditions on the market? If I were the regulator, I would have allowed Maybank and CIMB to submit their proposals and the RHB Cap board and shareholders to evaluate them. If good, let's merge and if bad, it will be rejected. Free market forces should reign. Not this ...” says an irate source who is close to the deal.
Was the central bank right?
Opinions are mixed depending on who you talk to on whether the central bank did the right thing.
“You can appreciate the central bank's concern. If the transaction is done at an unrealistic price, it would jeopardise the entire merger process. That's a legitimate concern. If it really wanted to interfere, it could have disallowed the sale (of 25% in RHB Cap). Bank Negara has authority to approve all major transactions in respect of banks. This sale involved a related party transaction. It had the right to conclude that the sale, done at a higher price, was impairing the merger possibility, hence it imposed those conditions,” says an astute observer.
In fact, he says, there was no compelling reason to allow a financial investor like Aabar to engage in a strategic stake in a bank, drawing a parallel with buyout firm Primus Pacific Partners' purchase of a 20% stake in EON Cap in 2008. “It's a strategic block. EPF needs a strategic partner not a financial investor. ADCB was at the least, ostensibly, a strategic investor.
“So, in the absence of a strategic partner, EPF needs a strategic merger ...,” he says.
But opponents of the central bank's “encroaching style” say it was unreasonable to set such conditions, especially as ADCB was a public-listed company (it is listed on Abu Dhabi Securities Exchange).
Significant pressure and criticism was piling on the central bank due to the unpopular decision. That was the beginning of the end. And as feared, the transaction posed an insurmountable psychological barrier for the merger plans to move ahead.
“Nazir's a fighter. But things were getting complicated and the truth was getting lost amidst all the spinning. Our best guess was the deal was not doable,” said a source close to the deal.
One meeting, two calls
Those involved, particularly the regulator and bankers, were beginning to feel uneasy. Against this highly-charged backdrop, it is believed that EPF chairman Tan Sri Azlan Zainol met up with central bank governor Tan Sri Dr Zeti Akhtar Aziz and deputy governor Nor Shamsiah Mohd Yunus on Monday (June 20). According to a source, EPF felt as if it did not have enough say in the merger process. The issue of pricing was also discussed as understandably, the Fund was eager to fetch the best valuation for a bank it controlled and successfully strengthened over the years. (EPF also has a 10.4% and 12% interest in Maybank and CIMB respectively. If the deal had happened and involved largely stock, EPF could have ended up with between 17% and 20% in the enlarged entity.)
According to sources, while Maybank had indicated a better offer price for RHB Cap, it was CIMB Group which was deemed a better fit with a stronger management to lead the charge for the merged entities. “Maybank was willing to bid higher. But CIMB's management made it a more compelling partner,” says the source.
At one point of the impasse, it is believed that an idea was floated for EPF instead to acquire CIMB although it cannot be ascertained how far this is true.
“There was a counter proposal. If CIMB deemed 2.25 book for RHB Cap too expensive, then EPF could acquire CIMB for 2.65 times. It would mean a tidy exit for Khazanah and in line with EPF's investment focus on dividend and capital appreciation,” says a source in the loop.
The pitch failed to pique interest but it drove home the point that EPF was keen to remain on the driver's seat of a banking group.
By late Monday, the deal became wobbly. “There was a risk of the merger, which was meant to enhance value, suddenly turning into a value destructive exercise. The regulator was not pleased with the direction of the whole process and had a change of heart after the meeting with EPF,” said a source.
The very next day, on Tuesday, sources said the central bank made two calls - one to Nazir and the other, to Wahid which would be the game changer. The regulator asked both men to pull the plug on the deal with the possibility of revisiting it some other time when normalcy resumed. On late Wednesday, sources said the Finance Ministry had finally given the consent for the deal to be called off.
Merger still on the cards
Even so, all may not be lost yet. Market wags expect the parties to resume talks again down the road. “It could take a further 3 months, maybe six months ... That may happen,” says a source.
Maybank's statement to Bursa that it has called off the talks “at this juncture” has further fanned such expectations.
“Ultimately, there will be a merger but one that is fair and transparent and mutually agreed by all parties and that is value enhancing for both groups,” says a source.
RHB Cap's counter has had a wild ride this June. Just days after the banking giants announced their merger plans on May 30, the shares surged to an all-time high of RM9.98. In contrast and as testament that the counter's sugar rush in recent weeks was largely on the back of the potential merger, it sufferred a massive smack down this week, losing some 9% of its value or 85 sen to finish the week at RM8.75 on news that the deal has fallen out.
At the current share price of RHB Cap or what one would say pre-merger talk levels, it could be a lot easier to return to the drawing board with RHB Cap's board and shareholders to discuss again merger plans. It's hard to resist the nagging suspicion could this have been part of the plan?
Sadly, even as RHB Cap echoes the cliche that things are very much business as usual, it may be the most impacted from this entire debacle. The auction conducted for ADCB's stake sale earlier had drawn a bid by Japan's largest lender Sumitomo Mitsui Financial Group. But the strategic block landed on Aabar's lap instead as the ongoing merger plans with Maybank and CIMB had created some uncertainty for the prospective shareholders.
Lest you forget, this could also inadvertently disadvantage EPF, whose deadline to pare down its stake in RHB Cap to 30% is looming closer.
Let this episode serve as a lesson on the indelible power of a strategic block, if the “Primus case” hadn't already, especially for a sector as pivotal and ironically as highly regulated as banking.(Star Biz)
Thanks for this post. it really illustrative.
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