By P. Gunasegaram
As merger deals go, it is simple yet elegant, straightforward and easy to understand – the merger terms for CIMB Group, RHB Capital and Malaysia Building Society Bhd (MBSB) that is. And it increases the chances of success so much that Tiger thinks it is nearly a done deal.
The mega merger between CIMB Group, RHB Capital and Malaysia Building Society Bhd (MBSB) to form Malaysia’s largest banking group took a firm step forward when directors of all three banking groups submitted a proposal for the merger terms.
That’s a big step forward for with board and top management agreement of the terms, half the battle is already won, with approval from shareholders and authorities the next major step. The terms further enhance chances of getting all shareholders to approve the deal, as Tiger will show, making it virtually a done deal.
Effectively, the deal is a reverse takeover of RHB Capital by CIMB Group shareholders who will hold 70% of the enlarged group post the deal while RHB Cap shareholders will hold the remaining 30%. Thus, merger or not, it is clear who will be in the driver’s seat – CIMB Group.
Briefly, the CIMB Group is valued at RM60.58 billion or RM7.27 a share. RHB Capital will issue shares in the effective proportion of one share for every 1.38 CIMB Group shares, valuing each RHB share at RM10.03.
Spoiling the spoiler
But regular followers of the deal are certain to remember a potential deal spoiler in the form of Abu Dhabi-based Aabar Investments PJS, which is over 98% owned by the International Petroleum Investment Company (IPIC), an arm of the Abu Dhabi government.
Aabar is no ordinary company. It is very closely linked to Malaysia’s own infamous “strategic investment” company 1Malaysia Development Bhd or 1MDB and closely involved with some of 1MDB’s shenanigans which KiniBiz has extensively chronicled here, here and here if you want to read about it.
Aabar, a “strategic” investment company is involved in an RM18 billion “strategic” – oh that word again! – partnership with 1MDB for the development of the Tun Razak Exchange or TRX, with much of the capital coming from Aabar.
On top of that Aabar’s parent, IPIC, guarantees US$3.5 billion of 1MDB’s loans taken for 1MDB’s energy acquisitions. And Aabar holds an option to subscribe for an initial public offer of 1MDB’s energy assets, whenever that happens.
That should be sufficient to show Aabar’s clout in Malaysia.
Aabar is a potential spoiler because it has a 21% stake in RHB Capital which it acquired (at that time it acquired a 25% stake) at RM10.80 a share in 2011, when CIMB and Malayan Banking were actually contemplating a takeover offer for RHB Capital.
The Employees Provident Fund (EPF), as a result of a takeover offer it made to protect its interests, ended up with a stake of over 80% in RHB Capital in late 2007. As part of Bank Negara Malaysia (BNM) requirements, the EPF was to pare down the stake.
In May 2008, months after its successful takeover of RHB Capital, EPF announced it was selling a 25% stake in the company to Abu Dhabi Commercial Bank (ADCB) for RM3.9bil or RM7.20 a share compared to its takeover price of RM4.80 a share. Yes, it was a strategic stake, nothing less.
ADCB was an investor for the long term and through its “strategic” stake it no doubt hoped to add more value to RHB Capital and to its own operations by establishing a strategic alliance. Otherwise it would not have paid more than a 40% premium to the market price.
But in the middle of a contemplated takeover of RHB Capital by both CIMB and Malayan Banking, ADCB sold its stake in RHB Capital to sister company Aabar Investments PJS (both are effectively owned by the Abu Dhabi government) for RM10.80 per share. That’s hardly an arm’s length deal but it was enough to scuttle the deal then.
Now, Aabar wants to play spoiler again. It has made it known it wants more than RM12 a share for RHB Capital. It and other AbuDhabi funds have threatened to pull out of various projects committed to, and it has lobbied hard to keep EPF out of the voting for the deal.
But this time, it is not likely to succeed.
Why the deal will likely go through
There are two scenarios to consider in this deal, one the EPF is allowed to vote, the other, EPF is not allowed to vote. But the deal is structured such that in either case, there is a better chance of shareholder approval for the deal.
Under current company legislation, a simple majority of shareholders at a general meeting is all that is required for an acquisition of assets. If EPF can’t vote its 41.5% stake, then the remaining 58.5% of shareholders, including Aabar (see chart) decide. Aabar’s 21% is about 36% of the 58.5% and therefore it is no means certain that it can block the deal.
If however RHB Cap was selling its assets to CIMB, 75% of shareholders approval is required and Aabar is in a pretty strong position to block the deal. It needs support from just another 4% of shareholders to block the deal instead of 14% under the current merger terms.
For CIMB Group to sell its business to RHB Capital, it would need 75% shareholder approval. If EPF can’t vote on the deal, it makes it difficult but not impossible for the deal to go through because of a strong base of institutional shareholders who will still likely back the deal.
But more likely than not, EPF is likely to be allowed to vote.
Why EPF should be allowed to vote
EPF has contended, most likely correctly, that it must be allowed to vote because it did not originate the deal, must be allowed the right to vote on its interests, and represents millions of members. Bursa Malaysia rules actually allow exemptions for cross holdings in related party transactions when these are funds.
But the problem is EPF has large stakes in all the entities involved. But still that is not reason enough to stop it from voting so long as it is not bringing the deal to the table. Otherwise, it will be denying major shareholders’ rights without sufficient reason.
There is a precedent, though it may not be a particularly good one. Ironically, it was CIMB’s investment bank which originated a deal for the merger of Sime Darby and a number of other companies under the Permodalan Nasional Bhd (PNB) stable, of which the main ones were Golden Hope and Kumpulan Guthrie.
While many expressed scepticism that PNB was unaware of the deal and that it did not actually originate the deal, PNB was still permitted to vote its shares for all the stakes it had in the various companies.
Right now it is much more believable that EPF did not originate the deal. If it cannot be proven otherwise, it only stands to reason that it must be allowed to vote. If it is allowed to vote, then the deal is almost certainly done.
The consequence, according to preliminary KiniBiz calculations, is that EPF may well become the largest single shareholder of CIMB (see chart), with a 22.6% stake because it receives CIMB shares for its RHB Cap stake too, eclipsing Khazanah’s Nasional stake which is whittled down to 20.4% stake from the 29.2% according to latest Bursa filings.
Meantime, Abaar will own a direct 6.3% stake in CIMB Group and can hope to partake of the long-term benefits of owning a dynamic, growing bank, with a strong regional presence. Why, it may not have to provide for diminution of value in its investments because of the share exchange deal.
The Islamic Bank
And then there’s the matter of MBSB which will be acquired either through cash at RM2.82 a share or equivalent in preference shares of the Islamic Bank which will be majority owned by the new merged entity. The assets of CIMB Group’s and RHB Cap’s Islamic banks will be merged with that of MBSB to form the new Islamic Bank.
That poses no problems to the basic merger between CIMB Group and RHB Cap.
And so finally, it looks like a number of things will be solved. EPF’s large – too large a stake – in RHB Capital and MBSB will be whittled down to more acceptable levels. A new bank will challenge Malayan Banking for supremacy, hopefully promoting competition rather than cartelisation.
And the thorny issue of an Abu Dhabi fund/funds owning a significant “strategic” stake in RHB Capital and preventing moves to merge the bank will finally be removed.
Not bad for three months’ work.
GRRRRR!!!
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