Royal Bank of Scotland and Malaysia’s CIMB Group yesterday said that they have reached an agreement that will see CIMB buy most of RBS’s cash equities, equity capital markets and corporate finance businesses in Asia-Pacific. The deal will propel CIMB into one of the largest regionally based investment banking franchises in Asia-Pacific and will enable RBS to exit these businesses at a limited cost.
According to a CIMB release, the bank will pay £173.9 million ($278.4 million) for the businesses, although RBS will also pay CIMB £13.8 million to cover the operational costs for the first year, resulting in a net payment for CIMB of about £160 million ($256 million). Of that, only £88.4 million will go to RBS, while the remainder will be injected into the operations it is acquiring. The price tag translates into about 0.98 times the net tangible assets of the RBS businesses, which reflects the fact that most of what CIMB is buying is cash, including actual cash, capital committed for a build out of the IT platform and goodwill.
The acquisition comprises RBS’s cash equities businesses in Australia, China, Hong Kong, India and Taiwan (including the cash equities sales desks in the US and the UK), as well as the ECM and corporate finance businesses in Australia, China, Hong Kong, India, Indonesia, Malaysia, Singapore, Taiwan and Thailand.
“This is an excellent opportunity to complete the build-up of our capabilities in Asia-Pacific markets, and to do it quicker and less expensively than if we grew organically,” said Dato’ Sri Nazir Razak, CIMB’s group chief executive. Following the acquisition, CIMB will have seats on nine exchanges and partnerships in three others, its research team will cover approximately 1,093 Asia-Pacific-based companies and it will see a big increase in global institutional investor relationships, Nazir said.
“Top-tier international investment banking is an important extension to CIMB Group’s Asean universal banking platform. CIMB’s expanded investment banking franchise will enable us to assist investors and businesses who want to move in and out of Asean or across Asia-Pacific as a whole,” he added.
Two RBS entities are excluded from the transaction for now, namely RBS’s 50% stake in Australian retail brokerage RBS Morgans and its 33% stake in Hua Ying Securities, its securities joint venture in China. According to a source, negotiations are continuing with regard to both of these entities, but the two parties didn’t want this to hold up the entire sale and hence decided to exclude them from the initial deal.
The Australian business will almost certainly be sold once the complicated shareholder agreement has been untangled, but it is less clear what will happen to the China JV. For one, Chinese regulations don’t actually allow RBS to sell its stake in the first three years. Hua Ying Securities only began operations in late May 2011.
As reported earlier, CIMB is also not buying the cash equities, ECM and corporate finance divisions in South Korea, and the cash equities businesses in Indonesia and Singapore, and RBS has already started to close these down. With regard to the latter two markets, CIMB felt there was too much overlap with its existing businesses, while in Korea, RBS wanted to hold on to its securities licence since its debt capital markets and fixed-income, currency and commodities (FICC) businesses (which RBS is retaining) operate under the same licence.
The final deal also excludes RBS’s cash equities businesses in Malaysia and Thailand, which were operated as partnerships with domestic brokerages. Again, CIMB saw too much overlap, since it already has the necessary licences in these markets.
In all, about 450 people will be affected by the takeover and will be offered new jobs at CIMB. Some people are likely to decline, but one source estimated that about 400 RBS employees will eventually transfer to CIMB, which is pretty good given that the pool of people that were affected by RBS’s January decision to exit its cash equities, ECM and corporate finance businesses across Asia-Pacific was about 600 to 650. If CIMB hadn’t stepped in as a buyer, these businesses would have been closed down (as is pretty much happening in Europe) and all of these people would have lost their jobs. In the announcement, CIMB said it expects 350 to 400 RBS staff to join its ranks.
The source said that CIMB is offering a retention package to RBS employees agreeing to transfer to CIMB, but said it is nowhere near the kind of guarantees that were offered by Nomura when it bought Lehman Brothers’ businesses in Asia. For one, it is not a multi-year guarantee.
One indication that it is a fair offer though is that a large portion of RBS’s senior management within these businesses has decided to join CIMB. Nazir told reporters at a press briefing in Kuala Lumpur yesterday that CIMB had asked 94 senior RBS officials to join the bank, and 87% had accepted the offer.
These include Matthew Kirkby and Peter Irvine, who have been instrumental in bringing this deal to fruition. Kirkby, who is Asia-Pacific head of global banking and global head of corporate finance at RBS, will become co-head of investment banking for Asia-Pacific at CIMB together with CIMB’s current head of investment banking, Swoi Lin Kong. He will also take on an additional role as country head for North Asia.
Irvine, who is head of equities at RBS, will become deputy head of institutional and retail equities.
Other people moving across to CIMB include Mike Netterfield, who will become co-head of corporate finance for Asia-Pacific together with CIMB’s Ong Ling Heng, and Manoj Agarwal, who will become co-head of ECM for Asia-Pacific together with CIMB’s Patrick Tan.
The fact that CIMB is giving these guys top positions within its organisation shows that it is keen to make the most of RBS’s investment banking experience as it builds its business in the region.
While acknowledging that there will be challenges with regard to taking on these new businesses, Nazir noted that CIMB has a proven track record in M&A and in the integration of banking and investment banking businesses across the Asean region.
“This won’t be the Asian century without Asian companies rising to the occasion. CIMB is not only stepping up, but also placing itself in a superb position to assist other companies in Asia to move across borders,” he said.
RBS, which is under pressure from the UK government to cut costs and to focus its resources on its key areas of strength, announced in mid-January that it would reorganise its wholesale business and close or sell its cash equities, mergers advisory, corporate broking and ECM operations in Europe, the Middle East and Africa, and Asia-Pacific as part of a plan to cut 3,500 investment banking jobs across the globe in the next three years. The bank has also laid off a number of people in its equity derivatives and fixed-income, currency and commodities (FICC) divisions across Asia in the past week as it tries to control costs in the businesses that it will retain.
The UK government owns a total of 82% (including B-shares) of RBS following a rescue takeover during the global financial crisis.