[SINGAPORE] It is a bumper of a deal - this merger between Malaysia's CIMB Group and RHB Capital, which never quite left the table since being scuttled three years ago on the back of mismatched price expectations. Only this time, there is a boost in the form of exempt finance company and property financier Malaysia Building Society Bhd (MBSB) to create a mega Islamic bank.
Yesterday, in keeping with CIMB's quest to boot rival Maybank from its perch as Malaysia's largest lender, the banks announced that Bank Negara Malaysia has given the nod for both CIMB and RHB, the country's second and fourth largest lenders respectively, to start talks to merge their businesses and to create an enlarged Islamic banking franchise with MBSB.
A 90-day exclusivity agreement is in place this time to negotiate and finalise details of the merger, with an option to extend the period - ostensibly to keep Maybank out of muscling in on the assets to guard its pole position.
CIMB chief executive Nazir Razak said in a statement: "There is a prima facie case for a value-creating merger between the three entities, and we want to get into detailed discussions to validate it."
Trading in the Bursa Malaysia-listed shares of the three firms were halted yesterday, pending today's announcement; trading resumes today. No other details were unveiled, except that the proposed merger will use the Wednesday pre-announcement closing share prices of the three firms as reference points.
If the deal materialises - and it is understood that it could involve an all-share swap deal or part shares and cash - it will create an entity with nearly $240 billion in total assets. Based on this, it will become Malaysia's largest bank - and in market value, it would almost match up to Maybank - and South-east Asia's fourth largest, still outflanked by Singapore's big three banks.
All three groups share a common shareholder - Malaysia's retirement fund the Employees Provident Fund (EPF). EPF, with RM600 billion (S$235 billion) in assets, is majority owner of RHB Capital and parent of RHB Bank, with a 41.43 per cent stake. It is also the controlling 65 per cent shareholder of MBSB and the second-largest shareholder of CIMB, next to Khazanah Nasional, with a 14.5 per cent stake.
The proposed union of the entities, understood to be led by the country's top banker Mr Nazir, will be crowned one of the the biggest mergers in the country's banking history and galvanise the banking sector in a market that has been disappointingly tepid so far this year.
CIMB's extensive reach in Asean melded with RHB's overseas network, particularly in Singapore and Indonesia, where it has seven and 17 branches respectively, would result in a merged entity with a much larger footprint in the region. In terms of retail banking, the merger with MBSB could spawn cross-selling opportunities as well.
It is also strategic, in a landscape bursting with competition, to eliminate the threat by merging with another.
Yet, the lure of scaling up aside, not everyone is enamoured by the deal. Bernstein Research said in a note yesterday that it did not see very significant top line or value creation synergies. "Cost reduction potential is there, but (would be) hard to extract, given the environment in Malaysia, where real headcount reductions are typically difficult," it said in a report titled "Big for big's sake". On the back of concerns such as pricing and execution challenges, the house sees "no compelling reason" to be positive on the deal.
There are big hurdles ahead. Pricing and divergent interests, the very same factors that scuppered CIMB's ambitions to buy out RHB and face off with Maybank back in mid-2011, still linger.
The tricky part is RHB's second largest shareholder Abu Dhabi state fund Aabar Investments, which owns 21.4 per cent interest. In what was deemed as a left-to-right hand transfer in 2011 - around the time CIMB and Maybank were courting RHB - Aabar bought that block from sister company Abu Dhabi Commercial Bank at a pricey RM10.80 per share.
That sale had set a high benchmark, as it was priced at 2.25 times book value, for both Maybank and CIMB to buy out RHB. Abbar was determined not to accept any offer below its entry point and it was a deal breaker.
This, despite the intervention by Malaysia's central bank, a cheerleader for consolidation among banks, to "decouple" the merger deal from Aabar's acquisition price. Amid mounting risk that CIMB and Maybank might overpay for RHB Capital and sour a value-enhancing deal, the deal fell flat.
If the deal in this current round of talks is not deemed a money spinner for Aabar, it could continue to be a stumbling block. A source close to the investment fund said it is unlikely to budge and may even seek a higher price of RM11.80 per share or 1.75 times book value, given its investment cost as it had borrowed to buy that stake.
Not everyone agrees ofcourse - least of all the proponents of the big merger.
A source said: "Aabar needs to be managed. It is stuck in that position, having paid a lot to get in. Aabar can either wait forever for RHB shares to reach that level, or it could exchange its interest for shares in a larger entity with more opportunities, ride it out and then exit."
For that reason, Bank Negara's next move bears watching.