PETALING JAYA – As speculated, the trio of CIMB Group Holdings Bhd, RHB Capital Bhd (RHB Cap) and Malaysia Building Society Bhd (MBSB) have unveiled a proposed merger structure that is quite unorthodox, with the smaller banking group taking over a bigger entity. All three banks announced to Bursa Malaysia that the merger will see the CIMB Group, which is the second-largest banking group in Malaysia, dispose all its assets and liabilities of RHB Cap via a share swap at an exchange ratio of one RHB Cap share for 1.38 CIMB Group shares. This is based on a benchmark price of RM7.27 per CIMB Group share and RM10.03 per RHB Cap share, translating into a price-to-book value (P/BV) ratio of 1.7 times and 1.44 times for CIMB Group and RHB Cap, respectively.

This valuation is based on CIMB Group and RHB Cap’s book values of RM4.28 and RM6.97 as at June 30. It has been speculated that the reason for the deal to be structured in such a way as for the RHB group, which is the smaller entity, to take over CIMB Group is because it was easier to get shareholder approval. “Since RHB Cap was acquiring, it would need approval of only 50% plus one share. If RHB Cap was being acquired, then the requirement for shareholder approval is 75% and it would be tough for the deal to happen,” said an analyst.  At CIMB Group’s P/BV of 1.7 times, this values CIMB Group’s merger consideration at RM60.58bil. Meanwhile, at 1.5 times, RHB Cap’s merger consideration is valued at RM25.8bil.

Pre-suspension yesterday, CIMB Group closed at RM6.98, which was a 29 sen discount to the RM7.27 reference price, while RHB Cap closed at RM8.70, which was a RM1.33 discount to the RM10.03 reference price.  This swap will see CIMB Group shareholders owning 70% of the merged CIMB-RHB group share capital, while RHB Cap shareholders will hold the remaining 30%. The counters of CIMB Group, RHB Cap and MBSB will resume trading effective 9am today.  The second part of the deal involves the proposed merger of CIMB Islamic, RHB Islamic and MBSB to create a mega-Islamic bank. This newly created mega-Islamic bank will remain a subsidiary of the merged CIMB-RHB.

Under this deal, CIMB Islamic will acquire all the assets and liabilities of MBSB at RM7.77bil or RM2.82 per share. MBSB shareholders will have a choice either to accept cash or new shares in the unlisted CIMB Islamic group. At RM2.82 per MBSB share, this represents a P/BV of 1.32 times. It is also a 45 sen premium on MBSB’s pre-suspension market price of RM2.37. Following the proposed acquisition, MBSB shall undertake a capital repayment exercise to distribute the rights of the MBSB consideration shares to all the shareholders of MBSB at an entitlement date to be determined later.  Upon completion, MBSB will be delisted from the main market.

“If all MBSB shareholders accept shares, then CIMB Group will end up with a 58% stake in the mega-Islamic bank,” said an analyst.  Meanwhile, CIMB Islamic will also acquire the assets and liabilities of RHB Islamic for RM4.15bil. At this purchase consideration, RHB Islamic is valued at 1.96 times P/BV as at June 30, 2014.  “The parties will now move towards the due diligence process in view of signing a definitive sale and purchase agreement (SPA) in early-2015,” the three banks said in a statement.  Following the SPA, the consent of other regulators and shareholders will be sought. The deal is expected to be completed in mid-2015.

As for the existing substantial shareholders of all the banks, the Employees Provident Fund (EPF) and Khazanah Nasional Bhd will end up holding a 45% combined stake in the merged entity.  Currently, the EPF owns 14.6%, 41.5% and 64.6% in CIMB Group, RHB Cap and MBSB, respectively. Khazanah is presently the largest shareholder of CIMB Group with a 29.19% stake.  Meanwhile, Abu Dhabi’s sovereign wealth fund Aabar Investments PJSC, which owns a 21.2% stake in RHB Cap, is expected to see its interest in the merged entity drop to 6.3%.

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