Saturday, 8 July 2017

(The Star) Will RHB-AMMB merger happen?

Retirement fund KWAP likely to play key role in making deal a success

After the 2015 proposed three-way mega merger of CIMB Group Holdings Bhd, RHB Bank Bhd and Malaysia Building Society Bhd (MBSB) fell through, the mood for banking mergers faded. Even before that, there had been other merger talks that did not materialise.

So, when RHB Bank and AMMB Holdings Bhd proposed to merge in April, market observers weren’t all that convinced that this marriage would actually take place.

The banking merger attempts were fraught with issues relating to pricing and shareholders’ disapproval.

In the current RHB and AMMB proposed merger, a key hurdle will be to secure the approval of all major shareholders in both banks.

The proposed merger is based on an all-share swap structure.

One major party is Australia and New Zealand Banking Group Ltd (ANZ), the single largest shareholder in AMMB with 24%. The problem is, ANZ has been looking to divest this stake for some time now. How then will ANZ feature in this proposed merger?

Enter the Retirement Fund Inc (KWAP).

The RM134bil retirement fund has been actively pursuing equity investments in recent years.

However, KWAP’s exposure to the banking sector remains small when compared with other government-linked investment funds in the country.

Which is why KWAP is likely to play a key role in the RHB-AMMB merger, paving the way for the deal’s success.

KWAP has indicated that it is interested to buy ANZ’s stake in the merged entity. This would pave the way for the Australian lender to exit and hence remove a key uncertainty in this deal.

ANZ has reportedly said it wants to sell its stakes in South-East Asian businesses to focus on its home market.

The bank sold its fleet finance operations and its stake in Shanghai Rural Commercial Bank Co this year, after disposing of other retail and wealth-management businesses in Asia in 2016.

ANZ is also selling its stake in Chinese lender Bank of Tianjin Co.

The bank may also look to divest its 39% stake in Jakarta-based lender PT Bank Pan Indonesia.

Back to the RHB-AMMB planned merger.

ANZ’s stake will come down to about 11% in the enlarged banking group after the share swap exercise.

KWAP has small stakes in both banks with a 3.05% stake in AMMB and 3.94% stake in RHB.

Maiden entry

If KWAP is able to hold up to 10% in the RHB-AMMB merged entity - by acquiring ANZ’s stake -- it would mark the fund’s maiden entry as a major shareholder in a bank.

Other Malaysian government-linked investment companies (Glics) own major stakes in local banks, led by the Employees Provident Fund (EPF) which owns 40.7% in RHB Bank and is a substantial shareholder in all other Malaysian banks.

Permodalan Nasional Bhd, the country’s largest fund manager, is a controlling shareholder in Maybank with 48%, while LTAT owns 35.4% of Affin Holdings that owns Affin Bank.

Meanwhile, pilgrims fund Lembaga Tabung Haji controls 52.5% of BIMB Holdings Bhd, which owns Bank Islam (M) Bhd.

In an interview with StarBizWeek, KWAP CEO Datuk Wan Kamaruzaman Wan Ahmad says: “The size of the (ANZ) stake in the combined RHB-AMMB banking group fits our investment appetite,” adding that if they buy that stake, KWAP would then request for a board seat in the merged entity.

“We are interested to buy up to 10% of ANZ’s stake in the merged entity, but of course it has to be at the right price,” he adds.

Meanwhile, a common shareholder in both RHB and AMMB is the EPF, which has a 40.8% stake in RHB and a 9.9% stake in AMMB.

It is understood that the EPF will be able to vote at both AMMB and RHB shareholders meetings to decide on the merger. This will be a different scenario from the previous three-way merger attempt, when the provident fund’s ability to vote was called into question due to issues of conflict of interest.

And now with the EPF owning 40% in RHB, it vote’s could push the RHB-AMMB deal through.

There are other major shareholders in RHB, namely Aabar Investments PJS with a 17.75% stake and OSK Holdings Bhd with 10.13%. How will these parties vote in the proposed merger?

In the past, Aabar had also attempted to get a buyer for its stake. However, it has not been successful to-date.

In fact, the Abu Dhabi sovereign fund was a stumbling block to the proposed mega-merger of CIMB-RHB-MBSB two years ago, because it had sought a high exit price.

Aabar has been on its own reducing its interest in RHB. Recall that it did not participate in RHB’s rights issue in December 2015, which diluted its stake to the current 17.8%.

Post the proposed merger between RHB and AMMB, Aabar’s stake could reduce to 10.2% of the enlarged entity. Bankers say it would be easier to dispose a block of that size.

Merging RHB and AMMB would grant the combined entity more scale, which would strengthen its position as the country’s fourth largest bank and stand a chance to compete with Maybank, CIMB, and Public Bank.

Based on the figures as at the end of last year, the combined assets of RHB-AMMB stood at RM368.3bil, trailing behind Public Bank Bhd’s RM389.73bil. RHB is currently the fourth-largest lender, while AMMB is the sixth largest based on asset size.

Analysts say that both RHB and AMMB are operating in the same space that would see duplications in terms of operations.

As such the two banks could find synergies post-merger, but could likely cause potential layoffs.

The deal between RHB and AMMB would involve all share swap arrangement at 1.0 times the price-book value.

Kenanga Research says the proposed merged entity between RHB and AMMB would pave the way for regional expansion.

“The new entity will be slightly superior to its top peers in terms of return on equity and capital adequacy ratio,” it said in a recent report.

“With the expected better value for the merged entity will fetch a better price for ANZ to exit,” it adds.

RHB and AMMB have until Aug 30 to exclusively discuss the deal.