This article first appeared in The Edge Malaysia Weekly on June 12, 2017 - June 18, 2017

KUMPULAN Wang Persaraan (KWAP), the country’s second largest pension fund, is expected to emerge as a substantial shareholder in the proposed RHB Bank Bhd-AMMB Holdings Bhd merged entity, sources say.  It could end up holding up to a 10% stake in the enlarged entity, they say.

According to a source, post-merger, KWAP is likely to acquire the bulk of the portion of Australia and New Zealand Banking Group Ltd’s (ANZ) underwritten shares  in the enlarged entity.  “The likelihood is that the institutional investor will come in, post-merger, to take up a portion of the ANZ block,” the source tells The Edge.

KWAP already has a 1.76% stake in AMMB, and a 3.94% stake in RHB, Bloomberg data shows. Post-merger, ANZ is expected to have just over 10% of the enlarged banking group.If KWAP were to come in and take a portion of it, this would resolve one of the tricky issues in the proposed RHB-AMMB merger: how ANZ — which has been looking to sell its 23.78% stake in AMMB — will exit, given that the merger is to be effected via an all-share deal.

RHB group managing director and CEO Datuk Khairussaleh Ramli had told analysts that RHB would be acquiring AMMB’s assets and liabilities in an all-share deal, and he hoped to do the deal at one-time book value. He stressed that there would be no cash involved.

“I wouldn’t be surprised if a government-linked investment company came in … because if ANZ doesn’t have a way to sell its shares, I don’t see how a merger can happen,” says an industry observer. ANZ is the single largest shareholder in AMMB.

Analysts had previously pointed out that as both RHB and AMMB are trading just under one-time book value and a share deal is done at book value, ANZ and other shareholders could exit at a later date.

The Employees Provident Fund is a common shareholder in RHB (40.7% stake) and AMMB (9.5%). RHB’s other major shareholders are Aabar Investments PJS (17.75%) and OSK Group’s Tan Sri Ong Leong Huat (10.13%). Aabar’s stake is now parked under Mubadala Investment Co.

Over at AMMB, founder and chairman Tan Sri Azman Hashim , who is stepping down from all roles in the group within two years,  has a 12.97% stake.

Assuming the share swap is done at book value for both banks, the shareholding structure post-merger is likely to be EPF with 27.9%, Mubadala and ANZ with 10.2% each, OSK with 5.8%, and Azman, 5.6%.

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

Industry observers point out that KWAP is the only government-linked investment company that does not yet have a major stake in a local banking group, which is why it is the most likely to emerge in the merged RHB-AMMB entity. KWAP’s fund size stood at RM125 billion in December 2016. Permodalan Nasional Bhd is already a major shareholder in Malayan Banking Bhd, while Khazanah Nasional Bhd is in CIMB Group Holdings Bhd, the Armed Forced Fund Board, or LTAT, is in Affin Holdings Bhd, and Lembaga Tabung Haji, in BIMB Holdings Bhd.

KWAP only has small stakes in several local banks. It has 3.12% equity interest in Maybank, 5.24% in CIMB Group, 1.1% in Public Bank, 0.57% in Hong Leong Bank Bhd and 0.81% in Alliance Financial Group Bhd.

Maybank Research estimates ANZ’s holding cost in AMMB to be about RM5.31 per share currently, about equivalent to AMMB’s March 2017 book value of RM5.32 per share.

ANZ first bought into AMMB in 2006, paying an average of RM3.63 a share for the stake over two tranches, or RM2.58 billion in total. This works out to a P/BV of 1.96 times, in line with mergers and acquisitions norms of about 1.9 times for Malaysian banks at the time.

ANZ had a carrying value of A$1.2 billion, or about RM3.9 billion, on the AMMB stake, according to its financial results for FY2016.   It made a massive impairment charge of A$260 million for the local lender in 1HFY2016.

The carrying value of RM3.9 billion translates into a P/BV of 1.06 times, which is close to what AMMB’s stock is currently trading at of 0.94 times book.

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