CIMB, RHB Capital and Malaysia Building Society have hammered out terms for a three-way merger, moving a step closer towards the creation a Malaysian banking giant.
The banks had entered into a 90-day exclusivity period in July and, having agreed terms, are now seeking Bank Negara approval. The merger, valued by Bloomberg at $22.3 billion, will transform the three into Malaysia’s largest bank and will also result in the creation of an Islamic mega bank.
Malaysia’s central bank has long been pushing for domestic consolidation and the three-way merger fashions a giant that can better compete against the likes of Singaporean lender DBS, Southeast Asia’s largest bank.
“There’s no reason why a Malaysian bank can’t be the largest bank in Southeast Asia, which is why the central bank has been pushing for consolidation,” a person familiar with the matter said.
As part of the deal, RHB Capital will acquire all the assets and liabilities of CIMB group in exchange for new RHB shares and CIMB will subsequently be de-listed. The merger will see a share swap between CIMB and RHB Capital at an exchange ratio of 1.38, or 1 RHB share for 1.38 CIMB share.
This is based on a benchmark price of M$7.27 for each CIMB share and M$10.03 for each RHB share; translating into price-to-book ratios of 1.7 times and 1.44 times for CIMB Group and RHB respectively as of end June.
This represents a premium of 0.4% to CIMB's share price and a 15% premium to RHB's share price on July 9, 2014. CIMB shareholders will own 70% of the merged CIMB-RHB group and RHB shareholders will hold the remaining 30%.
The deal was structured to get around certain constraints. Abu Dhabi lender Aabar Investments owns 21% of RHB and, according to Malaysian news reports, has been against the merger.
Aabar acquired its RHB shares at R$10.80 apiece but subsequently put in more funds, lifting its total investment to about R$12 per share. To raise the likelihood of the deal going through, RHB was chosen as the acquirer, as it requires 51% shareholder approval to acquire, as opposed to 75% shareholder approval if it were being acquired.
The other issue was Indonesia's CIMB Niaga, in which CIMB has a 97.9% stake. Indonesian regulators introduced new rules, only allowing foreign banks to hold a 40% stake in Indonesia lenders though it leaves room for exemptions. CIMB had acquired Bank Niaga before those rules kicked in.
It is unclear if that issue has been resolved, as RHB’s acquisition of CIMB is expected to trigger a change of control at Bank Niaga, raising the possibility that Indonesia’s central bank might require RHB to pare down its stake in the bank.
Shareholders are expected to vote on the transaction sometime next year and according to the source, the structure might change.
There are other questions that remain. Malaysia’s Employee Provident Fund (EPF) owns 41% of RHB, 64% of Malaysia Building Society and 16% of CIMB. For now, it isn’t clear if EPF will be able to vote at the shareholder meeting, given its interests in the three entities.
In tandem, CIMB Islamic, RHB Islamic and Malaysia Building Society will merge to form a mega Islamic bank. CIMB Islamic will acquire all assets and liabilities of Malaysia Banking Society, and the deal will be struck at M$2.82 per Malaysia Building Society share, which is a 20.5% premium to the market price on July 9. Malaysia Building Society shareholders will have the option of receiving cash or CIMB Islamic shares.
Malaysia Building Society does not have a banking license and has been under pressure from the Malaysian central bank to get one, so the merger resolves the issue of having to get a bank license. It will also be delisted.
According to a stock exchange filing, upon completion of the merger the enlarged Islamic bank may undertake a capital raising exercise and the merged entity is expected to retain a controlling stake.
The deal is expected to be completed by mid 2015, the three lenders said in a release.
RHB Investment is the principal adviser and Credit Suisse was financial adviser to RHB Capital. JP Morgan is advising CIMB and Citi is advising Malaysia Building Society. Barclays advised RHB Capital's independent directors.