KUALA LUMPUR, July 1 — RHB Capital Bhd would need an estimated RM58 billion to fund an acquisition of CIMB Holdings Bhd, said OSK Research today.
This comes as reports emerged this morning that RHB has turned hunter and is now seeking to take control of CIMB to create Malaysia’s largest bank, just a week after the latter called off merger talks due to cost issues.
OSK Research said in a report this afternoon that assuming a fair acquisition all-cash offer pricing of RM9.60 per CIMB share (3.02x1QFY11 PBV), it estimates that RHB would have to raise close to RM58 billion in new equity via a rights issue priced at a 25 per cent discount to the current market price in order to maintain the enlarged group’s core equity ratio at a reasonable 8.2 per cent.
The research house said it was equivalent to RHB raising its new share base by nearly five times to counter the RM47.7 billion in goodwill potentially arising from the acquisition.
OSK Research however said it was not in favour of the union as it would not be commercially attractive.
It added that with RHB being significantly smaller than CIMB, acquiring the latter will result in greater value destruction for RHB post-merger while the CIMB group would face even greater value destruction from such a merger as its current ROEs (return on equity) are hovering at 16-17 per cent.
“Such a proposal would again be purely for the purpose of attaining the ‘bragging rights’ to be the biggest, rather than the most effective or commercially viable, of mergers, in our view,” said OSK Research. “We believe that EPF, being RHB Capital’s largest shareholder, will certainly consider the merits carefully before leaping into such a union.”
The OSK report noted that RHB would have to take into account CIMB’s growing regional presence and favour with institutional investors which could also add a premium to the pricing.
“Even if the proposed acquisition of CIMB by RHB Capital was indeed true, we believe that is unlikely that RHB Capital will overpay as the sale by Khazanah could be part of a government mandate, while EPF will be answerable to its stakeholders as the acquisition in itself is not commercially viable,” said the report.
“However, pricing will again be a key stumbling block as RHB Capital would have to pay a respectable premium for CIMB to entice the latter’s foreign institutional shareholders to accept its offer given the group’s premium franchise, as well as entrenched and fast-expanding regional franchise.”
The Singapore Straits Times reported this morning that RHB, the target of a takeover bid by Malayan Banking Berhad and CIMB a few weeks ago, was planning to acquire CIMB in a bid to create a financial institution with a market value of roughly RM86 billion.
Banking sources confirmed the bid with The Malaysian Insider, saying RHB’s main shareholders — the Employees Provident Fund (EPF) and Aabar Investments — are more than ready to fund the proposed deal. EPF has some RM440 billion in total assets.
The sources also said that it will be an all-cash bid and CIMB’s main shareholder, Khazanah, could potentially walk away with nearly RM20 billion if it accepts the deal, and added that the CIMB brand name will be used if the deal goes through.
OSK said that given the combined shareholding of Khazanah and EPF of roughly 40 per cent, in order to make the acquisition under the asset and liability mode which requires 75 per cent shareholder approval, RHB Capital would require another 35 per cent of CIMB’s shareholders to approve the proposal.
The research house said that if the deal materialises, it would be negative for RHB, and could prompt a downgrade of the stock while the reverse would be true for CIMB and it would be positive for CIMB’s share price.
