In the summer of 2011, CIMB Group, the bank led by the hard-charging and politically-connected Nazir Razak, and Maybank, once Malaysia’s flagship bank, faced off in what was touted as the biggest corporate battle in the country in their bid to take over RHB Capital. But conflicting opinions which bank should win got a little out of hand. This forced the central bank Bank Negara Malaysia to call off the bids, thus sending both banks empty handed after weeks of separate negotiations with RHB.

Fast forward three years later, the CIMB Group returned with plans to not just merge with RHB Capital but also added smaller rival Malaysia Building Society (MBSB) into the equation. In early October 2014, the three parties agreed on their merger plans, after initiating talks in July this year, paving the way to the creation of a financial behemoth in Malaysia’s banking sector.

The transaction, if completed, would give rise to the largest banking group in Malaysia with assets of around US$190 billion, surpassing Maybank, and making it the fourth largest bank in Southeast Asia in terms of asset size.

It remains to be seen how the three-way merger of CIMB, RHB and MBSB will impact Malaysia’s banking industry, or whether it will trigger another round of mergers and consolidations in the domestic banking sector. The deal inevitably puts pressure on Maybank, currently the largest bank in the country, to look for possible targets to defend its leadership position.

However, the market is deemed consolidated and has limited acquisition opportunities, notes an observer. Public Bank is often cited as a potential target ripe for a takeover, considering the widespread concerns over its lack of succession plan given the advancing age of its founder and chairman Teh Hong Piow. However, with its stock trading at 3.6x tangible book value, it is one of the most expensive banks to be acquired, making it almost untouchable.

Another potential target seen is Ambank where Australian lender ANZ is the largest shareholder with 24% stake. ANZ has been looking to grow its shareholdings to 49% and play a more significant role in the bank. (Foreign shareholding in Malaysian banks is currently limited to a maximum of 30%, but the central bank has indicated that it could allow some entities to exceed that limit at its discretion, on a case-by-case basis.) However, Ambank chairman Tan Sri Dato’ Azman Hashim, who is the second largest shareholder in the group with 14.01% interest, is showing no sign of giving up his interest in the bank, hindering any take-over attempt by ANZ or any other third parties.

Share swap agreement

The merger of CIMB with the two smaller rivals will be executed with a share swap between the CIMB Group and RHB Capital at an exchange ratio of 1.38 (1 RHB capital share for 1.38 CIMB Group share). The ratio is based on the benchmark price of 7.27 ringgit per share of CIMB Group, which represents a price-to-book ratio of 1.70x, and 10.03 ringgit per share of RHB Capital, which translates to a price-to-book ratio of 1.44x.

As part of the agreement, CIMB shareholders will own 70% of the merged CIMB-RHB entity, with RHB shareholders owning the remaining 30%.

Concurrently, the Islamic entities of the two banks, CIMB Islamic and RHB Islamic, will merge with MBSB at a price of 2.82 ringgit per MBSB share, creating a mega-Islamic bank.

Shareholders of MBSB will have the option of receiving cash or CIMB Islamic shares as consideration. The proposed mega bank will remain a subsidiary of the merged CIMB-RHB group.

The three banks expect to sign definitive sale and purchase agreements in early 2015, following a due diligence process. The deal, which will require approvals from regulators and shareholders, is seen to be completed in mid-2015.

While the proposed three-way transaction does look ambitious because of its scale, market observers say CIMB’s experience and history, give regulators confidence that it is the most suitable candidate among its peers in Malaysia to make it work. The bank itself is the result of a number of large mergers.

Unlike in 2011, this time there are no competing bidders in the transaction, increasing the possibility that the deal will push through. Nonetheless, the complicated shareholder structure of the three entities still poses a challenge.

In fact, a possible deal breaker could be concerns over voting rights of Malaysia’s Employees Provident Fund, which holds substantial interest in all three banks. EPF owns 65% of MBSB, 41% of RHB Capital and 14.5% of CIMB Group. Reports suggest that the Abu Dhabi government, which owns 21.2% of RHB Capital, through its strategic investment company Aabar Investments, has formally reached out to the Malaysian government expressing its concerns about EPF’s voting rights in the deal.

As a substantial shareholder in all the three entities, EPF is prevented from voting in the deal as per Malaysia’s listing rules, but the pension fund has requested Bursa Malaysia to grant a waiver to be able to vote on the transaction. In the absence of EPF’s voting, Aabar will have a significant say in making or breaking the deal. Given that it was seeking a higher price of 12 ringgit per RHB share for its stake versus just 10.03 ringgit per share the proposed merger offers, Aabar could present a roadblock in the merger, if EPF is not allowed to vote in the deal.