K&N Kenanga-ECM Libra merger will create Malaysia's top independent investment bank

PITY the small banks. Since consolidation began in the sector, and
coupled with its obsession for ever larger, more regional banking
empires, the standalone financial institutions have had to shout to be
heard.
It was perhaps for this reason that the merger between the investment banks (IB) of K&N Kenanga Holdings Bhd and ECM Libra Financial Group Bhd flew under the radar somewhat, unlike the high-profile takeover of OSK Investment Bank Bhd by RHB Capital Bhd.
The transaction amount was also comparably lower, valuing ECM Libra Investment Bank Bhd at 1.27 times price-to-book, versus the 1.77 times and near RM2bil RHB Cap agreed to pay for OSK IB.
There
is also the niggling criticism among industry watchers about
Kenanga-ECM Libra that two small players do not a strong team make.
Nonetheless, one industry source is of the opinion that Kenanga may have gotten away with the better deal.
“Not
all their (OSK) international operations were profitable. The Hong Kong
and Cambodian markets for instance made pre-tax losses of RM11mil and
RM4mil in the 2011 financial year.
“Hence the price tag was
expensive, especially when you have 600 plus brokers in Hong Kong. It
costs less than RM5mil to buy a (stockbroker's) seat there,” he said.
In
any case, Kenanga has reason to be pleased about its soon-to-be member
of the family. The merger will catapult it to the position of the
country's No. 1 independent IB with a market share of 12.4% and 8.9%
respectively in trading volume and value.
It will overtake HwangDBS Investment Bank Bhd on both those counts and come in just behind RHB-OSK in volume and RHB-OSK and CIMB Securities in value.
Further,
Kenanga is poised to double its total branches as well as the number of
states it is operating in to 31 and 10 respectively.
“We have come a long way,” group managing director Chay Wai Leong (pic) said at a briefing to announce the merger on Friday.
“Kenanga
has been around for 40 years, and for the most part we have been a
mid-sized player. We and the board have looked at what our plans should
be going forward and decided that for the business to be meaningful, we
need to be a top three player.
“At the rate things are going,
there won't be many of us (independent IB) left. Who knows, there may
yet be more mergers and acquisitions.”
He also related to StarBiz
in an interview last week that this was not a complex transaction,
saying: “We are not going into a totally different business, just
vastly increasing the scale of it.
“We have a team that is able
to complete this integration, and if there are opportunities in the
future, we will make another acquisition. For us, it is about scale.”
Kenanga will pay RM875.1mil for ECM Libra's IB and stockbroking businesses via a combination of cash, shares and loan stocks.
The
cash portion stands at RM659.6mil, while the remaining RM215.5mil will
be settled by 120 million new shares of RM1 each and RM95.5mil in
redeemable non-convertible unsecured loan stocks.
Chay said the
merger would not be a strain on finances as the bank is
well-capitalised and would retain a capital adequacy ratio of 25%
post-acquisition.
As at March 31, Kenanga's cash and short-term
funds came up to RM1.48bil compared to its total assets of RM4.43bil
and liabilities of RM3.67bil.
It was reported earlier that both
parties opted for a mixture of cash and shares as Kenanga did not have
the financial appetite to digest an all-cash deal.
The banks plan to call their EGMs next month to seek shareholder approval for the merger to be completed by end-December.
Earnings-wise,
the acquisition is expected to boost Kenanga's revenue by 10% to 15%
annually within three years and result in cost savings in its branch
network, IT expenses, back office and support functions.
To a question on whether any staff cuts would take place, Chay replied that the Boston Consulting Group had been hired to evaluate the cost and manpower aspects of the transaction.
Asked
how its major shareholders figured in the deal, Chay said they were
supportive. “We did not have to ask them for a single ringgit.”
Kenanga's three largest shareholders are Cahya Mata Sarawak Bhd with a 25.1% stake, Deutsche Asia Pacific Holdings Pte Ltd with 16.6%, and Tengku Datuk Paduka Noor Zakiah with 16.5%.
Their equity will be diluted to 21% for the former and 13.8% for the latter two shareholders.
In
terms of strategy, the bank has set its sights on two niche areas: it
wants to galvanise the currently dismal participation of retail
investors in the market as well as gain a leadership position in
independent advisory.
As for ECM Libra, the disposal will allow its major shareholder, Tan Sri Azman Hashim, to comply with regulations that prohibit a single individual from holding substantial stakes in more than one IB.
Besides his 16.18% stake in ECM Libra, Azman also holds 17% in AMMB Holdings Bhd, which owns Ambank.
The deal leaves ECM Libra's asset management and unit trust operations intact, and it will have 12 months to look for a new core business if it intends to stay listed.
However,
finance executives familiar with the situation said that while ECM
Libra had held on to its asset management unit in a bid to keep its
listing status, this may not be good enough.
“They (major shareholders of ECM Libra) may still have to sell it and eventually exit the business,” one of the people said.
Meanwhile,
its shareholders stand to receive a distribution of up to 68 sen per
share, a notable sum considering the company's last transacted share
price of 86.5 sen prior to its suspension on Friday.
ECM Libra shares have gained 12% so far this year. The company is also planning a share split and share consolidation.