Malaysia’s quest to build a national and regional banking champion was thwarted anew when the much-flagged three-way merger of CIMB Group, RHB Capital and Malaysia Building Society (MBSB) was called off in January 2015.

The three institutions withdrew the US$22 billion planned merger, citing the altered macro conditions in Malaysia, which weighed down on the alliance’s financial merits.

“When the decision to pursue the transaction was made, it was looked at on the basis of certain parameters. Those parameters changed over time to the point the reasons why the transaction should be supported were no longer there,” says a source close to the deal.

CIMB, RHB and MBSB first explored the merger plan in July 2014 with an aim to create Malaysia’s largest banking group as well as a mega- Islamic bank.

The merger was to be executed via a share swap agreement between CIMB and RHB at an exchange ratio of 1.38 (1 RHB share for 1.38 CIMB share). The ratio was based on the then share price of 7.27 ringgit per share of CIMB group, which represented a price-to-book ratio of 1.70x; and 10.03 ringgit per share of RHB, which translated to a price-to-book ratio of 1.44x.

As part of the agreement, CIMB shareholders were to hold 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, were to be merged with MBSB at a price of 2.82 ringgit per MBSB share, creating a mega-Islamic bank.

The chances the deal was going to reach the finish line were increasingly becoming remote after CIMB’s share price fell more than 20% since the merger terms were announced in October 2014, making the transaction much more expensive for CIMB and less attractive for RHB shareholders who were getting the CIMB shares in exchange of RHB shares.

The weakening performance of CIMB’s s Indonesian subsidiary CIMB Niaga, which was affected by the headwinds in the country, was another setback to the transaction. The difficult operating conditions in Indonesia, including higher loan impairments, coupled with the weakened rupiah dragged on CIMB’s profitability.

Additionally, MBSB, a non-bank entity, needed to be converted to a bank and this provided extra financial burden to the merger.

Aabar Investments, the investment holding company of the Abu Dhabi government, which owns 21.2% of RHB, was pushing for a higher price, but it was not in a position to block the deal, despite the fact that Malaysia’s Employees Provident Fund, which owns stakes in all three entities (65% in MBSB, 41% in RHB and 14.5% in CIMB), could no longer vote on the transaction. Had the economic merits remain, the deal would have gone through, a source notes.

The cancellation of the deal is expected to put a pause to Malaysia’s domestic bank merger theme for the near term, but the case of banking consolidation remains strong in Malaysia and it won’t be long before other merger and acquisition attempts will be seen, banking experts claim. “The fundamental merits of the consolidation still stand and the motivation of the regulators to see the consolidation happen is still quite strong,” an M&A banker comments. “While the institutions that are involved in this transaction may take a breather before they come to the market again, transactions involving other banks are still possible.” – GD