This article first appeared in The Edge Malaysia Weekly on October 14, 2024 - October 20, 2024

AFTER decades of organic growth in Malaysia, Public Bank Bhd (KL:PBBANK) pulled a surprise last week by announcing its first big merger and acquisition (M&A) since acquiring Hock Hua Bank Bhd in early 2001.

In a packed press conference last Thursday (Oct 10), managing director and CEO Tan Sri Tay Ah Lek unveiled a plan to acquire a 44.15% stake in general insurer LPI Capital Bhd, a related company, for RM1.72 billion cash or RM9.80 per LPI share.

What stole the show, though, was an announcement by Diona Teh Li Shian — youngest daughter of the late Public Bank founder Tan Sri Teh Hong Piow — that the Teh family would be progressively paring down its interest in the bank to 10% over five years, from 23.41% now, through a restricted offer for sale (ROS) of shares at a discount to “all employees, directors and eligible shareholders”. Details of the exercise would be announced later, she said.

A 10% stake means the Teh family, currently the largest shareholder, would become the bank’s second-largest shareholder after the Employees Provident Fund (EPF), based on current shareholding levels.

As at Oct 11, EPF owned a 14.71% stake in the country’s third-largest banking group by assets, while Retirement Fund Inc (KWAP) held 4.07%.

The family’s plan to trim its 23.41% stake in this manner makes it much harder for rival banks to attempt a merger with Public Bank, industry observers note.

“There will no longer be one big strategic stake to buy, so any suitor is not guaranteed a large block, making it harder to attempt an M&A,” a senior banking analyst tells The Edge.

This, added to the fact that it was always going to be an expensive endeavour to acquire Public Bank given its high valuation, reduces the likelihood of M&A even further, he says.

The family’s 23.41% stake in Public Bank was worth RM19.59 billion, based on its closing share price of RM4.31 last Friday (Oct 11). The stock trades at a price-to-book value of about 1.5 times, the highest among its peers, which some analysts say is justified, given that it has the highest return on equity in the industry. Its ROE stood at 12.7 % last year.

Asked on Thursday whether there had been any recent overtures made by rival banks or parties for the Teh family stake, Li Shian replied: “No, there have not been any.”

Li Shian also says that there are no plans for any of the Teh family members to join the bank’s board or management.

The ROS announcement by Li Shian was significant as it was the first time the family had come out to say how it planned to comply with a Financial Services Act 2013 (FSA) requirement that limits the stake of individuals in financial institutions to 10%.

Her presence at the press briefing also marked the first time any of Teh’s children — none of whom are involved in the running of the bank — had been put in the public eye.

The late Hong Piow had been exempted from the shareholding rule, given that his shares were accumulated before the FSA came into being. Apart from Hong Piow, two other individuals — Tan Sri Azman Hashim of AMMB Holdings Bhd (KL:AMBANK), with his 11.83% interest in AMMB; and Tan Sri Quek Leng Chan of Hong Leong Bank Bhd (KL:HLBANK) (64.51%) — also fell under this so-called grandfathering rule.

That the Teh family has to comply with the FSA’s shareholding rule shows that the exemption does not extend to their children.

“Investors have wondered over the years whether the family of the late [Hong Piow] will sell down their stake in Public Bank completely, and if so, whether this would attract M&A interest from other banks, which can then create a protracted M&A exercise that might not necessarily be value-/franchise-accretive. The confirmation that the family only intends to sell a 13% to 14% stake to investors and employees, at a discount over a five-year period, puts an end to this speculation and ensures that the franchise is likely to be preserved,” says Tushar Mohata, a banking analyst at Nomura Research, in a report.

“Having said that, there is some concern that, given the size of the 13% to 14% stake of RM12 billion, even a progressive sale over five years will create an overhang on Public Bank’s share price. We agree with these concerns, but, all things considered, the structuring of the two transactions together seems to be the least disruptive course of action to us, if the goal is to eventually comply with the FSA.”

Public Bank’s ROS exercise could set a precedent as to how Azman and Quek would eventually manage their shareholding.

“While we do not believe they would necessarily follow Public Bank’s precedent in managing its shareholdings, we could at least establish that financial institutions do uphold regulations as required,” says Kenanga Research banking analyst Clement Chua.

While details of the ROS have yet to be unveiled, there is already market speculation that EPF — a substantial or major shareholder in almost all Malaysian-listed banks — is likely to want to take up some of the shares, given Public Bank’s decent dividends.

Nevertheless, it is early days yet and The Edge understands that details of the ROS have yet to reach the EPF’s decision makers.

Sources also point out that EPF — and other institutional shareholders — are subject to a 5% limit increase for bank holdings. EPF’s current stake, at 14.72%, is already close to 15%. To increase it beyond that would require Bank Negara Malaysia’s approval. (The FSA is silent on shareholding limits for institutional investors. Previously, under the Banking and Financial Institutions Act 1989, there was a 20% cap.)

Many believe that if there are to be any bank mergers in future, they are likely to be driven by EPF — given its strong shareholding in some of the lenders. As it stands, EPF is the largest shareholder in RHB Bank Bhd (KL:RHBBANK), AMMB and MBSB Bank Bhd (KL:MBSB).

At Thursday’s press conference, Tay said Public Bank was not averse to further M&A possibilities, and that its expansion focus was the Indochina region.

“If there is any viable project or company for acquisition, we are always open to it, as long as it brings added value to the Public Bank group,” he said. Asked if an acquisition could include banks, he declined comment. In recent years, Public Bank has undertaken M&A activity only in its overseas markets. The most recent — completed in June — was its purchase of a stockbroking firm in Vietnam from RHB for RM72.55 million.

Analysts are positive on Public Bank’s plan to acquire the 44.15% stake in LPI from the Teh family.  At RM9.80 a share, the acquisition price is at a 25% discount to LPI’s last traded price of RM13 prior to the announcement of the deal. The price values LPI at 1.71 times its book value and 12.41 times its 2023 earnings.

“We are positive on the deal primarily for two reasons: (i) the acquisition price is at a discount of more than 20% to the average share price of LPI in the past year, demonstrating Public Bank’s discipline in its M&A endeavour; and (ii) the deal will be funded internally, carrying lower funding cost compared to issuing new debt or equities,” says CGS International Research.

Most research houses expect the acquisition to provide a mild uplift of up to 2% to Public Bank’s earnings in the financial year ending Dec 31, 2025 (FY2025). The deal, which is subject to the approval of Public Bank’s non-interested shareholders, is expected to be completed by 1QFY2025.

Analysts believe the bank’s shareholders are likely to approve the deal due to the financial and business benefits.

“While a general offer for the remaining LPI shares will also be triggered at the same price, we do not expect any significant take-up for this from LPI investors due to the discount, which should limit the outlay for Public Bank to RM1.72 billion,” Nomura Research says, noting that the bank intends for LPI to remain listed.

Analysts note that even though the bank may end up getting less than a 50% stake in LPI, it would be able to consolidate (instead of equity account) the latter’s earnings, given the extent of control it will have over the company.

In addition, although the acquisition will reduce Public Bank’s Common Equity Tier 1, or CET1, capital ratio slightly, it will remain at comfortable levels and will not affect the bank’s dividend payout guidance of 50% to 60%.

Maybank Investment Bank (Maybank IB) Research sees Public Bank’s CET1 ratio at the group level reducing marginally to 14.3% from 14.5%, and at the commercial bank level to 12.4% from 13%.

“We estimate a marginal 1.4% enhancement to Public Bank’s FY2025 earnings and a slight enhancement in ROE to 12.9% from 12.7%,” the research house says of the acquisition.

Nevertheless, all eyes will be on LPI’s 1.1% stake in Public Bank. Analysts say the stake will eventually be disposed of to avoid cross-holdings. LPI’s 212.6 million shares in the bank were worth a hefty RM972 million, based on their last traded price prior to the announcement of the deal.

“This shareholding is expected to be disposed of over the next six to 12 months. RM972 million works out to RM2.44 per LPI share, and we would not rule out the possibility of a special dividend from this,” says Maybank IB.

UOB Kay Hian Research believes there will be minimal share overhang from the Teh family’s move to reduce their holding.

“Compared with ANZ’s larger 16.5% stake disposal in AMMB and Aabar’s typical block size stake sale of 3% to 6% in RHB, both AMMB and RHB saw their share prices recover within one to two months after the disposal. Given Public Bank’s greater liquidity and the potentially smaller block sales (2.7% per year, assuming equal distribution over five years), we anticipate minimal share price overhang,” it said.

Nevertheless, concerns over a potential share overhang from the ROS led to Public Bank’s share price falling 26 sen to RM4.31 last Friday, giving it a market value of RM83.66 billion. It was the first day of trade since the stock’s suspension on Wednesday pending the deal announcement. LPI shares fell 40 sen to RM12.60, for a market value of RM5.06 billion.

Bloomberg data shows that 16 analysts have a “buy” call on the stock, while three have a “hold” and one, a “sell”. The 12-month target price was RM5.16, which suggests further upside.

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