Mega merger may be aborted

PETALING JAYA: Affin Hwang Capital in a research note on Friday opined that recent news on the possibility of Malaysia Building Society Bhd (MBSB) opting out of the proposed merger with CIMB Group Holding Bhd, RHB Capital Bhd (RHBCap) may see the whole deal fall through.
"From what we understand, should MBSB be taken out of the merger exercise, potentially due to the need to raise further allowances in order to be standardised with CIMB and RHB's accounting practices, we believe that the merger will be aborted, as the entire exercise will not materialise without one or the other," the research house said in a report.
News reports on Thursday said the proposed three-way merger of CIMB-RHBCap-MBSB was at risk as MBSB may not be part of the deal and because valuations for CIMB and RHBCap may also be revised due to the collapse in market values of the two banking groups.
Affin Hwang said it is reasonable to anticipate a potential revision in the share swap pricing, which is 1.38 CIMB shares valued at RM7.267 with one RHBCap share valued at RM10.028 at lower multiples, due to the weak market conditions. As a result, this could be a reason for the delay in the exercise and the due diligence process.
"From our understanding, the proposal does not garner strong support from investors due to concerns of synergy creation, higher merger cost of RM1.4 billion and high premium valuations and hence, it was no surprise that the share prices of these banks have underperformed," it said.
Should the deal not go through, Affin Hwang does not anticipate a sharp re-rating in share prices of the banks involved, as concerns on asset quality remain on RHBCap.
It placed a "hold" call on RHBCap and CIMB at a target price of RM6.90 and RM5 respectively, while its rating on MBSB remains a buy at a target price of RM2.75.