KUALA LUMPUR: Affin Holdings Bhd and Daiwa Securities Group Inc failed to put forward a deal for the latter to acquire a minority stake in Affin Hwang Investment Bank Bhd (Affin Hwang IB) after initiating talks 20 months ago.

In an internal circular sighted by The Edge Financial Daily, Affin, which wholly-owns Affin Hwang IB, said despite the best efforts of both parties, they were not able to conclude the negotiations in accordance with the terms and conditions set by Bank Negara Malaysia’s (BNM) approval letter dated Oct 25, 2016, within the stipulated time frame that expired end-December last year.

Accordingly, Affin said the approval granted by the central bank has lapsed. It also made a similar announcement to Bursa Malaysia yesterday.

Nevertheless, Affin said in the circular that it remained committed to continue its strong relationship with Daiwa.

“Although this outcome is clearly disappointing for both Affin and Daiwa, both of our groups have committed to continuing our efforts to build upon the strong relationship that we have developed since first entering into a business alliance in December 2013, and our companies will continue to work closely with one another on other collaboration opportunities,” it said.

“These initiatives include the Joint Distribution and Marketing Agreement involving institutional equities and research collaboration, as well as the investment banking collaboration initiative which includes the secondment of a Daiwa member of staff to Affin’s office in Kuala Lumpur,” it added.

Due to the highly strategic nature of the relationship between both parties, Affin said its expectation is that there will be other opportunities to build upon and further strengthen the alliance with Daiwa in the future.

This is the second deal in less than three months to have fallen through in the banking sector. On Nov 4, 2016, Hong Leong Financial Group Bhd announced that it could not reach an acceptable commercial agreement with BNM-approved negotiating parties for divestment of Hong Leong Assurance Bhd and Hong Leong MSIG Takaful Bhd.

Hence, the group and its potential buyers have mutually agreed to cease negotiations.

The failure of Affin and Daiwa to conclude the acquisition within the stipulated time frame came as a surprise given that the deal has been through 10 months of negotiations since April 29, 2015 before the proposed deal was submitted to BNM by end-February last year.

By last Oct 25, Bank Negara issued its approval for the proposed acquisition, followed by the Securities Commission’s greenlight in early November.

Still, The Edge weekly had in its Oct 31, 2016 issue reported that industry observers were wondering if Daiwa would patiently sit through the deal because it had taken an unusually long time for the central bank to revert with its approval.

The report, quoting sources, said that BNM’s conditions relate mainly to Daiwa’s potential entry as a strategic minority shareholder in the investment bank.

It is understood that the proposal that the parties submitted to Bank Negara for approval on Feb 29 entailed Daiwa acquiring a 25% to 30% stake in Affin Hwang IB in an all-cash deal.

The report also said that BNM’s concerns could be related to certain rights that Daiwa wants as a significant minority shareholder, for example, board representation and voting rights as it does not want a situation where a foreign minority could interrupt or have too large a say in the day-to-day operations of the entity.

Earlier in its March 14, 2016 issue, The Edge weekly reported that the proposal valued Affin Hwang IB at a price-to-book (PB) multiple of between 1.45 and 1.6 times.

This compared with the PB multiple of 1.28 times that Affin was subject to when it acquired HwangDBS Investment Bank — which now forms part of Affin Hwang IB — back in 2014.

It is also a premium over the average PB multiple of 1.3 times for mergers and acquisitions in the Malaysian investment banking space since 2000.

Therefore, it was inferred that Daiwa had larger plans for Affin Hwang IB, given its willingness to pay a high premium for a minority stake.

Unlike its larger peers such as CIMB Investment Bank and RHB Investment Bank that already have regional operations, Affin Hwang IB, has yet to venture abroad. It, instead, has business alliances with foreign partners.

Affin Hwang IB and Daiwa started a business alliance in December 2013, sharing equity research reports with each other’s clients, and facilitating equity trades.

Daiwa, Japan’s second-largest securities firm after Nomura Securities, has been looking to acquire minority stakes in brokerage firms in Asia to generate more income from abroad.

Currently, Daiwa’s only investment in an Asean brokerage is Vietnam-listed Saigon Securities Inc.

Last April, Daiwa raised its stake in Saigon Securities to 15% from 10% previously.

Nevertheless, the Daiwa group has a presence in most key markets including Singapore, Hong Kong, South Korea, Taiwan, India and the Philippines.

Affin’s share price gained three sen or 1.27% to close at RM2.40 yesterday, giving it a market capitalisation of RM4.66 billion.