Will CIMB raise cash or do a share swap?

by **Cals** Mon 04 Aug 2014, 02:00

Published: Saturday August 2, 2014 MYT 12:00:00 AM
Updated: Sunday August 3, 2014 MYT 12:18:07 PM
[size=40]Will CIMB raise cash or do a share swap?
BY RISEN JAYASEELAN[/size]
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THE mega banking merger in the works is increasingly speculated to be one that is going to get done.
In other words, there is a high chance that CIMB Bank Bhd (pic) will merge with RHB Bank Bhd and Malaysia Building Society Bhd (MBSB) to create the largest banking group in the country.
It is however unclear at this point, what structure this merger will take. Being the larger of the two banks, CIMB is seen as the party that will consume or take over RHB and MBSB.
There are a few options on what methods it could use to achieve this.

One is that CIMB could raise new capital from the issuance of new shares and use that cash to buy out RHB and MBSB.
Another option is to do a share swap – swap CIMB shares with that of RHB and MBSB. Notably, there could also be a combination of the two methods, where CIMB makes a cash or share offer to the owners of RHB and MBSB.
It has been widely speculated that the deal would entirely be via a share swap. Credit Suisse in a recent note justified this hunch on the basis that “CIMB does not have excess capital to undertake such a large transaction.”
RHB Capital Bhd (the owner of RHB Bank) has a market capitalisation of close to RM23bil while the market values MBSB at just over RM6bil.
Credit Suisse also pointed out that a share swap would enable the Employees Provident Fund (EPF, which owns 41% of RHB, 66% of MBSB and 15% of CIMB) to consolidate its holding in the financial services sector.
According to Credit Suisse’s analysis, EPF’s stake in the enlarged entity would rise to 27% from 15%, because of its holdings in all three entities.
In a share-swap exercise though, the issue of valuation will crop up. The value ascribed to each entity would translate into the share exchange ratio.
But even if the valuation issue is worked out, another complication would crop up if some shareholders of RHB and MBSB would want to receive cash instead of equity in the merged entity.
“It has become common practice in recent bank mergers and acquisitions (M&As) for there to be a cash option being grated to shareholders. This deal would probably have to have it as it is something that banking regulator would encourage,” said an M&A specialist.
All recent banking M&As have had a cash option (see table). In fact most of the recent deals have only a cash component, where the acquirer would pay the acquiree a cash sum to buy out the latter’s assets and liabilities.
That cash sum would then be distributed to the shareholders of the acquirer.

The SPV method
Another structure being speculated is that a special purpose vehicle (SPV) would be created for this merger. This SPV would essentially make an offer (either cash or shares or both) to the equity owners of all the three financial institutions. And this SPV would end up becoming the merged entity with the assets of all the three parties.

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An investment banker with experience in banking M&A explains that using the SPV would be ideal as the dilutive effects stemming from a fund raising would be clear to all.
“If CIMB Group were to raise cash by itself first, then Khazanah, its major shareholder, would suffer one level of dilution, even before the entry of the other shareholders like the EPF, into the enlarged entity,” he says.
The SPV could embark on a new share issuance on a “back-to-back” basis on this deal, he adds. This means that the SPV, being the mega bank in the making, is able to sell its own equity to new shareholders keen on owning a slice of this new giant.
This method, if planned and executed well, would probably be the most advantageous: the new shareholders coming in could bring their financial might or even expertise and connections; the merged bank would be in a better position to be capitalised going forward, considering the increasing capital adequacy requirements; and the diversification of shareholder base of the merged bank, by seeing a further dilution of single large shareholders such as Khazanah and EPF, further.
Under the Financial Services Act 2013 (FSA), holding companies that hold more than 50% of financial institutions are to come under the purview of Bank Negara. The FSA as a whole is aimed at bringing about more transparency, accountability and governance and to make sure institutions have sufficient assets to meet their obligations. Indeed, the ultimate structure that this mega banking merger will take will not only take into account the needs of all existing and new shareholders but also how the structure would best absorb the principles outlined in the FSA.
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