CIMB takeover?

Kuala Lumpur: Analysts are not keen on the prospect of RHB Capital Bhd (RHBCap) potentially initiating a takeover of CIMB Group Holdings Bhd, a banking rival about three times its market size, as suggested in a news report.

Read more: CIMB takeover? http://www.btimes.com.my/articles/prepos-2/Article/#ixzz1R1On0pX9

They said that the move would be "value-destructive".

Both banks have denied they are in discussions for such a move. The denials came about after Singapore Straits Times reported yesterday, citing unnamed government and banking sources, that work was still in progress on the deal that would create Southeast Asia's biggest banking entity by market value. It was said that RHBCap would likely make an all-cash offer for CIMB. "The push is still for consolidation of the (banking) sector, and this is one of the options being considered," the Straits Times was told by a senior government official familiar with the situation, who added that no timeframe had been set for the proposed deal. RHBCap's biggest shareholder, the Employees Provident Fund (EPF) with a 45 per cent stake, said it was unaware of such a plan. "The EPF is unaware of any discussion concerning RHBCap taking over CIMB and as a shareholder, we would not know if any bank level talks are being held on the issue," an EPF spokesperson told Business Times. The news report took analysts by surprise as RHBCap has long been viewed as a takeover target rather than an acquirer. "It's a case of the hunted suddenly turning into the hunter," remarked one. Up until last week, RHB had been the one pursued for a takeover by not just CIMB, but also Malayan Banking Bhd. Both the bigger banks however aborted their respective plans after Abu Dhabi Commercial Bank set a high valuation bar when it sold its 25 per cent stake in RHBCap to Aabar Investment, a sister company, at RM10.80 a share. "There could be something to the report as behind the scenes, people may still be exploring possible structures for a RHB-CIMB merger to go through. It may be motivated by parties higher up," an analyst from a foreign research house opined. He said one possible structure is for RHBCap to raise funds via a rights issue that would be taken up entirely by the EPF, which could then, in a back-to-back deal, sell back a substantial stake of the enlarged entity to Khazanah Nasional Bhd. Khazanah, the government's investment arm, is a key shareholder in CIMB. EPF also owns about 12 per cent of CIMB. A spokesperson from RHBCap said yesterday the bank "is not in discussion with CIMB on any potential takeover offer". A CIMB spokesperson, meanwhile, emphasised that CIMB had ceased negotiations on RHBCap, and "there is no change in that position". Lim Sue Lin, a banking analyst at HwangDBS Vickers Research, doesn't think it makes sense for a smaller bank to buy a bigger one. This has not happened before with any success in Malaysia, at least not since Bank Negara Malaysia started encouraging market-driven mergers. "The deal seems unlikely given the relatively smaller size of RHBCap compared with CIMB. I think it would be better the other way around," Lim remarked. OSK Research, in a note to clients yesterday, said although EPF can well afford to back an all-cash deal, which is likely to be the preferred method should Khazanah be interested in an all-out exit, the merger would be value-destructive as there were too many lines of revenue duplications. "And with RHBCap being significantly smaller than CIMB, acquiring the latter will result in greater value destruction for RHBCap post-merger," it said. OSK estimated that the merged entity faces a potential earnings dilution of 12.5 per cent even before factoring in "negative synergy" arising from the merger. It also estimated that RHBCap would have to raise close to RM58 billion via a rights issue, assuming a cash offer of RM9.60 for each CIMB share, which is a book value of 3.03 times. CIMB's share price closed unchanged in the stock market at RM8.93 yesterday. OSK noted that pricing would be a key stumbling stock in any such deal as RHBCap would have to pay a respectable premium to entice CIMB's foreign institutional shareholders. "Even if the proposed acquisition of CIMB by RHBCap was indeed true, we believe that it is unlikely that RHBCap will overpay as the sale by Khazanah could be part of a government mandate, while EPF will be answerable to its stakeholders as the acquisition in itself is not commercially viable," it added. RHBCap's share price eased 1 sen to RM9.15 yesterday.