This article first appeared in The Edge Malaysia Weekly on June 5, 2017 - June 11, 2017

A key issue that arises from the proposed merger between RHB Bank Bhd and AMMB Holdings Bhd is whether their common major shareholder, the Employees Provident Fund (EPF), will have voting rights in the deal.

“We need to understand the structure of the scheme to see our voting entitlements. We have to wait for that,” the EPF’s CEO Datuk Shahril Ridzuan tells The Edge when asked about it.

Recall that this issue was a major stumbling block in the proposed banking mega merger of RHB, CIMB Group Holdings Bhd and Malaysia Building Society Bhd (MBSB) about 2½ years ago. Bursa Malaysia’s listing rules did not allow it to vote on the deal as it owned major stakes in all three entities.

The EPF, through two of the banks, applied for a waiver from the rules but Bursa stood firm, even after an appeal was made on the matter. At that time, the EPF was the single largest shareholder in RHB and MBSB with a 41.5% and 64.6% stake respectively, and held a 14.6% stake in CIMB.

Bursa, in explaining its rejection, pointed out that the EPF’s position was not the same as the other shareholders in the companies. It said its controlling stakes in the two companies put it in a position of “significant influence”. It also believed the EPF had prior knowledge of the proposed merger.

The EPF vote at that time was seen to be a crucial deciding factor on whether the CIMB-RHB-MBSB merger would go through. The merger was later called off in early 2015 as the parties felt a worsening economic outlook no longer made it compelling.

In the RHB-AMMB case, the EPF currently holds a 40.7% stake in RHB and 9.84% in AMMB. Interestingly, the EPF has pared down its stake in AMMB. In late March, it held 11.68.% and at end-2016, 14.94%.

As a big shareholder in both banks, it raises the question as to whether it will be able to vote on the deals. Bursa’s listing requirements, Chapter 10.08(7), in a nutshell, states that in a meeting to obtain shareholder approval, a related party with any interest — direct or indirect — must not vote on the resolution in respect of a related party transaction (RPT).

However,  there are exceptions to a transaction being deemed an RPT, including if the major shareholder is “a statutory institution who manages funds belonging to the general public”. But, this is not so clear cut as there are also other considerations, depending on the case.

It is understood that when this deal — which is now being worked out — comes to a vote, RHB, as the acquirer of AMMB’s assets and liabilities, would need 50%-plus-one-share approval from shareholders for it to go through. AMMB, meanwhile, would require 75% shareholder approval in a special resolution vote.

In RHB’s analyst briefing last Thursday, when asked whether key shareholders would be permitted to vote on both banks’ sides, its group managing director  and CEO Datuk Khairussaleh Ramli responded: “This is something we have to analyse and engage with relevant authorities, including Bursa, to check who would be able to vote.”

Apart from the EPF, RHB’s other major shareholders are Aabar Investments PJS (17.75%) and OSK Group’s Tan Sri Ong Leong Huat (10.13%). Aabar’s 17.75% stake in RHB is now parked under Mubadala Investment Co — a bigger sovereign fund from Abu Dhabi.

“A key point to note is whether the EPF ...  is able to seek a waiver from regulators to allow them to vote in this deal. Under the current ruling, they will not be allowed to vote as they own stakes in both RHB and AMMB which raises the issue of conflict of interest.

“Assuming the EPF is not able to vote [at RHB] and that Aabar may vote against the deal, it is crucial that the deal gets the support of OSK and Permodalan Nasional Bhd’ s funds, which on a combined basis would have an effective 39.6% stake in RHB — excluding the EPF from the shareholders voting base. In such a scenario, the deal would require only 30% of the remaining minority shareholder to vote in favour to achieve a simple majority,” UOB Kay Hian Research says in a June 2 report.

Over at AMMB, its largest shareholder Australia and New Zealand Banking Group Ltd (ANZ) wants to exit and has been looking to sell its 23.78% stake. ANZ had said last November that it planned to sell its stake over the next 12 to 18 month.

AMMB’s next biggest shareholder is its founder and chairman Tan Sri Azman Hashim, who holds a substantial stake of 12.97%. He is retiring from all his positions within the group over the next two years, and hence, likely to be more open to paring down his stake.

All-share deal, asset and liability route

The Edge Financial Daily reported on June 2 that RHB and AMMB’s merger plan involves RHB buying all of the latter’s assets and liabilities in an all-share deal. RHB told analysts last Thursday that it hoped to do the deal at one-time book value (BV).

Khairussaleh stressed that there would be no cash involved, the daily also learnt. This raises questions as to how ANZ would exit, if there is no cash.

Khairussaleh said that this was the right time for the two banks to go into a merger, particularly because both are trading at close to their BVs. “So, if we can do it at book, that will be great. We minimise goodwill to optimise the financial outcome,” he said.

RHB was trading at a price to BV of 0.97 times prior to the merger ­announcement, while AMMB was trading at 0.98 times.

An industry observer points out that as both banks are trading just under one-time book value now and a share deal happens at book value, ANZ and any other shareholder could exit at a later date.

Assuming the share swap is done at book value for both banks, and none of the shareholders sell their stakes before completion of the merger, the shareholding structure post merger is likely to be: the EPF with 27.9%, Aabar at 10.2%, OSK at 5.8%, ANZ at 10.2% and Azman with 5.6%.

“It makes sense. It’s easier for ANZ to sell a 10% stake in an enlarged bank rather than a 24% stake in a smaller bank and it will be the same for RHB shareholders  that may want to exit. Placing out a 10% block in an enlarged banking group with a RM37 billion market capitalisation will be easier, I reckon,” says a banking analyst that covers both the stocks, adding that an all-share deal would be less dilutive and that they can overcome the dilution in two to three years.

Maybank Investment Bank research says there is the risk of a potential share overhang should the major shareholders choose to exit. “However, the combined shareholding of Aabar, OSK, ANZ and Azman works out to be 31.5% post-merger and it would be a positive if a strategic shareholder could be identified to take up this block,” it writes in a June 2 note.

DBS Group research notes: “While it is still early days, what remains a risk is the acceptance by the other key stakeholders. Deal-breakers for most M&As would be pricing or shareholders’ disapproval.”

The most recent banking merger in Malaysia was between Hong Leong Bank Bhd and EON Capital Bhd in 2011, which was done at 1.4 BV (see chart). This was a period when banks’ return on equity (ROE) and net interest margins were notably higher. “In the current environment of ­stricter capital requirements amid the competitive landscape, valuations may not necessarily be as attractive,” Public Investment Bank Research says.

Upon resumption of trading last Friday, RHB and AMMB’s shares fell. RHB’s stock fell 3.71% to close at RM5.19 while AmBank was down 2.3% to RM5.09.

Interestingly, the trading volume in both counters jumped last Wednesday, the day before the stock was suspended. AMMB’s volume soared 546% from the day earlier to 28.5 million shares — over eight times its one-year daily average of 3.25 million. As for RHB, its volume rose 182% from the day earlier to 2.6 million shares, higher than its one-year daily average of 1.82 million.

RHB and AMMB, in separate stock exchange filings on June 1, said they had obtained Bank Negara Malaysia’s approval, which is valid until Nov 30, to start discussions for a possible merger of their “business and undertakings”.

The two banks have now entered into a three-month exclusivity agreement, which expires on Aug 30, to negotiate and finalise the pricing, structure, and other terms and conditions. They said there could be an automatic extension of the exclusivity period, if needed.

The merger will make the enlarged group No 1 in asset management, general insurance and equities broking, and No 2 in Islamic banking. It would also make it the ninth largest bank by assets in Asean, creating a bigger platform for it to grow further at home and regionally.

In an internal memo to staff on June 2, Azman and AMMB group CEO Datuk Sulaiman Tahir said, given the challenging state of Malaysia’s banking industry, a merger of this nature would allow AMMB to tap onto greater opportunities. “As a larger entity, there is greater potential to compete on a larger scale, including on a regional level. New possibilities for career advancement and professional development will certainly open up as the merger is expected to lead us into a much bigger league,” they said. A day earlier, RHB’s CEO had also sent a similar memo reassuring staff about the merger.

Indeed a merger between RHB and AMMB would propel the total assets between them to RM365.88 billion, only slightly behind the RM380.05 billion of the third largest banking group, Public Bank Bhd. AMMB, on its own, is the sixth largest.

While it is obvious the merger would bring about a larger banking group, banking analysts say significant cost synergies are required for the merged entity to be accretive.

Based on a back-of-the-envelope calculation on revenue attrition downside and cost synergies, UOB Kay Hian estimates that the merged entity will be required to shed about 18% of its combined staff headcount of roughly 25,000 and 20% of other operating cost (for example, branches, IT and marketing) for it to realise a positive uplift in ROE from the current 8.3% to 10.0%.

Key to its assumption is a potential revenue attrition of 15%, which the research house believes is realistic given the inherent duplications within the merged entity’s corporate and investment banking division. “As the potential scale of such an exercise could involve an estimated 4,000 staff and closure of 80-100 branches, it will require a fair degree of gestation,” it says.

Indeed, should the shareholders give the green light for the deal, the other hurdles to pass would be realising cost synergies and efficient execution of the exercise. Now, that would be when the real marathon starts.

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