By Stephanie Jacob
CIMB Group Holdings Bhd (CIMB Group), RHB Capital Bhd (RHB Cap) and Malaysia Building Society Berhad (MBSB) have ceased discussions on a proposed merger and creation of a mega Islamic bank in light of current economic conditions.
Representatives from CIMB Group and RHB Cap said that concerns over the inability to create value for stakeholders in the current economic conditions was the reason behind their decision to call it off.
Tengku Zafrul Tengku Aziz
“We thoroughly deliberated the merger, and while we remain convinced that the combination of our three franchises follows sound strategic logic, we ultimately were not able to arrive at a value creating transaction for all stakeholders. The decision to cease discussions was arrived at after a detailed review of potential synergies that could be realistically delivered, especially in the current economic environment,” said Tengku Zafrul Tengku Abdul Aziz, CIMB Group acting group chief executive officer.
RHB Cap Group Managing Director Kelle Kam meanwhile said “we undertook the discussions of the proposed merger on the premise that we would be able to arrive at a value enhancing proposal for our stakeholders and bring it to our respective shareholders. Protecting and creating stakeholder value is paramount to all parties and given the changes in environment we could not conclude a case to proceed further.”
Ahmad Zaini bin Othman, President and Chief Executive Officer of MBSB said “the opportunity to be a part of a mega Islamic bank was an exciting one for us. Given that the discussions have ceased, we can now continue to focus on the strength of our franchise and achieving the goals that we have originally set for ourselves.”
Nazir Razak
All three representatives went on the record to express their gratitude to the counterparts and wished each others well in their future endeavours. Earlier today, CIMB Group Chairman Nazir Razak refuted that RHB Cap were demanding more money and said that the relationship between the entities remained ‘superb’.
In view of this decision, CIMB Group and RHB Cap have withdrawn their application to Bank Negara Malaysia and that the exclusivity agreement entered into by the parties in July has been terminated in line with the cessation of talks.
To recap, in early July the three entities confirmed that they entered a 90-day exclusivity agreement and would begin negotiations with the aim of merging the businesses of both RHB and CIMB as well as creating an enlarged Islamic banking franchise in partnership with MBSB.
In October it was announced that the merger will be conducted via a share swap between CIMB Group and RHB Cap at an exchange ratio one RHB Cap share for 1.38 CIMB Group shares based on a benchmark price of RM7.27 per CIMB Group share and RM10.03 per RHB Cap share.
Under the deal, RHB Cap will effectively acquire CIMB Group’s business by issuing shares in exchange. CIMB Group will be valued at RM7.27 per share or RM60.58 billion while RHB Cap will be valued at RM10.03 per share, a premium of 15% to the share price on July 9, the date before the merger announcement. The deal values RHB Cap at RM25.80 billion.
Last week, banking counters across the board fell into the red on Bursa by varying levels. As of mid last week, CIMB Group had fallen 25% from where it was in early October when details of the proposal were first released. Meanwhile RHB Cap dropped 16% during that same period.
On Thursday, Bloomberg quoted unnamed sources as saying that CIMB Group and RHB Cap would reconsider the terms of their proposal that was announced in early October. It said that given the drop in CIMB Group’ share price, RHB Cap investors might oppose the original terms of the deal.
Meanwhile, in a research note addressing MBSB’s position, UOB KayHian opined that the crux of MBSB shareholders concerns “could be related to the discrepancy in the provision methodology of MBSB which would likely result in the reduction in the offer price for MBSB if it were to align its provisioning policies closer to that of CIMB Group’s and RHB Cap’s which are on Malaysian Financial Reporting Standards 139 (MFRS139).” With the offer price for MBSB involving a cash option, a severe reduction in the offer price might not sit well with its shareholders, it added.
The Malaysian Financial Reporting Standards 139 deals with valuations for financial assets and liabilities. Different standards adopted can change reported profit.
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