Written by Chris Ng
Read this article from the Malaysian Insider:
"PUTRAJAYA, June 19 — Bank Negara governor Tan Sri Zeti Akhtar Aziz has declined comment on the central bank’s new and unusual conditions imposed in the sale of the RM5.9 billion sale of a 25 per cent stake in RHB Capital Bhd between two Abu Dhabi sister firms.Bankers have likened to the beginnings of a “nanny state” in the banking sector and say the bank should remain as regulators.“I’m not going to comment on individual banks,” she told The Malaysian Insider today when asked her response to mounting criticism to the move. The Malaysian Insider had earlier reported puzzling requirements by the central bank, including for Abu Dhabi Commercial Bank (ADCB) and new RHB shareholder Abu Dhabi investment fund Aabar Investments to adjust the sale price if the merger price is lower than the RM10.80 per share price agreed by both companies and the merger must not deviate too far from the market price so as to weaken the merged entity.The Malaysian Insider understands that after the deal was signed on Friday, Bank Negara sent a series of harsh emails to ADCB telling them to state the conditions imposed by the central bank in their press releases, which some bankers say is an aggressive and unusual intervention for such a matter.The country’s two biggest banks — CIMB Group Holdings Bhd and Malayan Banking Bhd (Maybank) — have won separate Bank Negara approval to begin competing merger talks with Malaysia’s fourth biggest lender RHB Capital, triggering a takeover battle that may create Southeast Asia’s biggest bank. CIMB, led by by Datuk Seri Nazir Razak, is the front-runner for the deal. “This should be a free market transaction. Why the need for the strange conditions,” a banker told The Malaysian Insider on condition of anonymity.“Bank Negara should also allow the new shareholders to decide if they want to support a merger or not. We don’t need a nanny state in banking,” he added.Analysts have said the RHB Capital takeover could be based on a price to book value of 2 to 2.5 times which will work out to between RM9.70 and RM12 per share. Based on RHB’s share base of 2.2 billion shares, any investor buying EPF’s entire stake would have to pay up to RM26.3 billion."
After reading the article, I have been wondering what is the maximum price would MBB or CIMB pay for RHB? Is RM10.80 per share a "deal breaker"? Management of MBB and CIMB have been saying that they will only do the deal if the deal is earnings accretive (i.e the earnings per share, EPS should be higher for the combined entity than the EPS of the standalone acquiring bank).
Based on this presumption, I went to set out a simple merger analysis to compute what is the maximum price that will be offered by both MBB and CIMB (under a 100% share exchange) scenario. My simple analysis is as follows:
My preliminary observation:
In Scenario 1 (MBB merging with RHB), the maximum share price that could be offered under a proposed share exchange is RM11.63 per each ordinary RHB share before the combined EPS of the merged entity fall below RM0.51 per share (i.e the EPS of MBB before it is merged).
In Scenario 2 (CIMB merging with RHB), the maximum share price that could be offered under a proposed share exchange is RM11.90 per each ordinary RHB share before the combined EPS of the merged entity fall below RM0.47 per share (i.e the EPS of MBB before it is merged).
In conclusion, it appears that CIMB has more "room" to play in terms of the purchase consideration. This is mainly due to that the fact CIMB is currently trading at a relatively higher P/E and P/B than of MBB and as such, a share exchange will be more favourable to CIMB.
Do bear in mind that we have assumed following for the simple merger analysis:
1. Mode of purchase is financed purely by share exchange
2. Analysis is based on last audited numbers (FY2010) - should be further updated with the latest numbers
DISCLAIMER: This article is not an invitation to buy or sell. It is only my observation and for educational purpose, this does not represent an investment advisory service. The content on this site is provided as general information only and should not be taken as investment advice. All site content, shall not be construed as a recommendation to buy or sell any security or financial instrument. Furthermore, the information presented in this article or this blog has not been independently verified and are subject to inaccuracies. Any action that you take as a result of information, analysis, or commentary on this site is ultimately your responsibility. The author may own shares in the company. Kindly consult your investment adviser before making any investment.
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