CIMB and Southern. It's a deal!

After five months of negotiating, CIMB Group's Bumiputra-Commerce Holding Berhad and Southern Bank say they will merge.
CIMB GroupÆs Bumiputra-Commerce Holdings Bhd. (BCHB) upped its offer for Southern Bank Bhd. to M$6.7 billion ($1.8 billion) on Wednesday (March 15), after months of heated negotiations over MalaysiaÆs largest banking takeover.

BCHB, the nationÆs second-largest lender sweetened the deal to M$4.30 per share, up about 4% from an initial hostile offer of M$4.15.

CIMB Group and Southern Bank, which is the nationÆs second-smallest lender, jointly announced the proposed merger, saying they now have unanimous support from the boards of directors of both BCHB and Southern Bank, "as well as endorsement from substantial shareholders of Southern Bank" for the proposed acquisition by BCHB û alluding to the five-month old negotiating struggle.

Commerce International Merchant Bankers Bhd and JPMorgan are the advisors for CIMB Group's BCHB, while Goldman Sachs is the advisor for Southern Bank.

The specifics of the proposal, which needs approval from Bank Negara Malaysia, the central bank, is that BCHB will pay M$4.30 per Southern Bank share and M$2.56 per warrant. Southern Bank shareholders will also receive a gross dividend of 5 sen per share and have a choice of taking the payout in cash or in a combination of cash and unsecured loan stocks.

In addition, Southern Bank will set aside M$50 million for loyalty and severance payments to its directors and staff. The voluntary general offer is expected to be completed in late May. Then, BCHB will merge Southern with its existing business and eventually delist the bank.

According to analysts, the deal has been valued at roughly 1.92 times book value, but it rises to 2.1 if an upfront loan loss provision of M$300 million is factored into the equation. By comparison, Malaysia's Public Bank paid 2.5 times book value to buy Hong Kong's Asia Commercial Bank last month, although valuations in Hong Kong tend to be much higher.

BCHB is expected to pay for much of the acquisition using its own cash, however some of it may be debt-funded. Analysts say BCHB could raise up to M$4 billion in hybrid or senior debt to help fund the offer.

ôThis proposed merger and acquisition is strategic and consistent with our priority agenda of transforming our consumer banking franchise,ö says CIMB Group Chief Executive Nazir Razak of the deal. ôIt augurs well for the future as it gives us the lead in the long anticipated next round of banking consolidation, positioning the BCHB Group even stronger in terms of diversity and scale with total assets increasing from M$121 billion to M$152 billion.ö

By comparison Malayan Banking Bhd - the country's number one lender - has M$192 billion of assets. The acquisition will bolster BCHB GroupÆs consumer banking, given that Southern Bank boasts a client list of wealthy individuals and small businesses, which will help it compete against Maybank.

Consolidate or die

The sector has been attempting to consolidate ahead of next yearÆs industry liberalisation when foreign banks will be permitted to establish a greater presence locally. It shrunk from 54 banks prior to the Asian financial crisis to 10 by 2000, but since then, marriages have been hard to negotiate. This deal puts the number of banks at nine.

But pair-ups are necessary for the banks to survive, as next year, in order to fulfil World Trade Organization commitments, Malaysia will permit the foreign banks operating in the country, such as Citigroup and HSBC, to set up as many as four additional branches each.

Indeed, Southern Bank Chief Executive Director Tan Teong Hean, who was one of the detractors of the original offer, said at the press conference announcing the deal: "Today, we are at the centre of the largest, most public takeover in Malaysian history with ripples that will be felt in corporate Malaysia. Developments here will trigger a second wave of consolidation in the financial sector as the industry prepares for a new age of fierce global competition when Malaysia opens its doors to further market liberalisation."

Tan has been offered an executive advisory role for two years at BCHB to help with the integration but he has yet to accept the offer, Nazir comments.

Market rumours circulated in September that CIMB wanted to make an offer for Southern Bank. In October, it received approval from the central bank to make an offer only to find a cool reception: While a major Southern Bank shareholder group, the Selangor royal family, favoured the merger, Southern Bank's chief executive, who is also a substantial shareholder and arguably the architect of the bankÆs recent growth, Tan, argued at the time that Southern Bank should remain independent.

A formal offer was made on February 13, with CIMB willing to pay M$6.35 billion ($1.7 billion) for Southern Bank. It made two separate offers: One was a direct offer of M$4.15 to all Southern Bank shareholders. The second was to Southern BankÆs board of directors û proposing M$4.08 a share in cash for the operation, which valued the lender at M$6.17 billion.

The next day, Southern Bank said its board had unanimously rejected the CIMB offer because it "fundamentally undervalues" the bank. It also claimed the offer didn't comply with the country's takeover and merger regulations and it rejected a call to hold a shareholders' meeting to vote for the offer.

At that point, it looked like the deal was dead. But mergers are needed in the sector to survive.

According to Bloomberg, BCHB shares, which have risen 7.9% this year, rose 15 sen, or 2.5%, to M$6.15 before they were halted from trading on March 13 ahead of the merger announcement. It was the stock's biggest gain since Feb. 6.

On the same day, Southern shares added 4 sen, or 1%, to M$4.20 before their trading was suspended.
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