What’s Up? Maybank

Maybank

What’s Up? … dated Jan 2011

Maybank through its wholly-owned subsidiary, Aseam Credit Sdn Bhd (ACSB), has proposed to acquire a 44.6% stake in Kim Eng Holdings Ltd at S$3.10 per share, amounting to S$798mil (approximately RM1.9bil).

It entered into conditional sale and purchase agreements with Ronald Anthony Ooi Thean Yat and Yuanta Securities Asia Financial Services Ltd for the acquisition of 15.4% and 29.2% stakes respectively in Kim Eng.

Kim Eng is a leading stock broker in ASEAN with a top five position in Singapore , Thailand , Indonesia and the Philippines . It also has a presence in global financial centres, including Hong Kong, London and New York .

As of Sept 30, 2010, Kim Eng's total assets and shareholders' equity amounted to S$2.697bil and S$938 mil, respectively. Upon completion of the acquisition, Maybank will be required to make a mandatory general offer for the remaining 55.4% shares in Kim Eng, with an intention to privatise the company.

The total consideration for the acquisition of 100% of Kim Eng would amount to S$1.79bil (RM4.26bil).

The proposed transaction represents an acceleration of Maybank's investment banking and equities platform in ASEAN, addressing an important gap in Maybank's footprint.

Maybank had a sufficient capital base to finance the acquisition with internal funds and external financing. Maybank planned to sell Singapore dollar-denominated bonds to finance the exercise but don’t plan to do a rights issue.

Meanwhile many wanted to know if the country's largest bank in terms of assets was indeed overpaying for the stake in the Singapore brokerage.

The concerns are valid as Maybank was widely criticised for having paid hefty premiums of 4.65 and 5.1 times price-to-book value respectively to enter the Indonesian and Pakistan markets in 2008 and many wonder if it will do the same this time around.

In total, Maybank paid RM12.5bil for its acquisition spree in 2008 which included Bank Internasional Indonesia, MCB Bankin Pakistan , and An Binh Bank in Vietnam .

Maybank would pay RM4.2bil to buy the entire stake in Kim Eng. This works out to about 1.9 times book and is deemed as “fair price.'' In terms of price-to-book value, it is not far from the 1.4x CIMB Bhd paid for Singapore 's GK Goh.

The deal appears to be generally neutral from an EPS and valuation perspective for Maybank. The acquisition PER of Kim Eng, at 20 times, is higher than Maybank’s own forward consensus PER of 14.8 times. In terms of price-to-book ratio though, Kim Eng’s 1.91 times is slightly lower than Maybank’s 2.25 times.

In any case, any financial impact is expected to be minimal in the near term given Maybank’s large size.

Kim Eng is bigger in size, and Maybank gets exposure to markets beyond Singapore . Kim Eng has operations in Thailand , Indonesia , the Philippines and Vietnam broking markets. For Maybank, the purchase broadly fits its aspirations of evolving into a major player in South-East Asia .

But there is a missing link, which is Thailand . This deal gives it the broking and investment banking business exposure but not commercial banking. Given the political instability there, Maybank may want to wait a while. The nature of the deal implied that Maybank is willing to take on a stronger player and consolidate rather than starting afresh.

Kim Eng is a strong franchise and it would have taken Maybank a while to build its own franchise in Singapore . Even with Kim Eng, more work is required to beef up its investment banking and broking busineses to build its market share.

Maybank had a sufficient capital base to finance the acquisition with internal funds and external financing. Maybank planned to sell Singapore dollar-denominated bonds to finance the exercise but it does not plan to do a rights issue.

Maybank would approach Japan-based Mitsubishi UFJ Financial Group, which is the second largest shareholder in Kim Eng with a 28.05% stake, on the merits of the acquisition. And it could be a wild card in this deal.

Maybank is purchasing its shares from substantial shareholders Ronald Ooi (15.4%) and Taiwan ’s Yuanta Securities Asia Financial Services Ltd (29.2%) for a total of rm1.9 billion at S$3.10 per share.

As Ooi’s and Yunta’s stakes collectively exceed 30% of Kim Eng’s paid up capital, Maybank will have to make a MGO for the rest of Kim Eng’s shares. The bank has also announced that it plans to delist Kim Eng.

However, all of this would depend on Mitsubishi UFJ, given its substantial stake in Kim Eng. A decision not to accept Maybank’s offer could throw a spanner in the works for the local banking group as it needs 90% acceptance before it can compulsory acquire the rest of Kim Eng’s shares.

Maybank has no plans to raise the offer price as under the Singapore listing rules, Maybank us unable to raise its offer any further.

Is Mitsubishi UFG likely to accept Maybank’s S$3.10 per share offer? The Japanese lender had started accumulating its 29% stake in Kim Eng more than three years ago and sources said that its average cost for its 29% stake works out to be around S$2.13 per share.

Moreover, given that the fact Maybank would already have a combined stake of 44.6% from Ooi and Yuanta, it would be just a matter of time before it crossed the 50% controlling threshold. That could be another factor for Mitsubishi UFJ to consider when making its decision.

Maybank just needs just over 30 million more Kim Eng shares to reach the 50% level.

It is worth noting that Mitsubishi UFJ has ties to CIMB as it belongs to the MUFJ group, whose Bank of Tokyo-Mitsubishi UFJ owns a 5% stake in CIMB.

In line with the exercise, Maybank also plans to initiate general offers for Kim Eng’s listed units in the the Phillippines and Thailand . Kim Eng is the single largest shareholder, with a 42.4% stake, in Philippines-listed ATR Kim Eng Financial Corp, and owns 55.3% in Thailand-listed Kim Eng Securities ( Thailand ) Public Co Ltd.
Maybank would hold talks with the regulators in both countries on the potential general offers for the shares in ATR Kim Eng and Kim Eng Securities ( Thailand ).

Maybank would appoint representatives to the board of Kim Eng, which recently inked a deal with Berjaya Corp Bhd’s (BCorp) Inter-Pacific Securities to undertake a joint venture for stockbroking operations in Malaysia .

Maybank would also approach BCorp to iron out operational issues following the acquisition of Kim Eng. The deal with BCorp was to give Kim Eng an entry into the Malaysian market. However, with the latest turn of events, Inter-Pacific Securities no longer fits into the picture.

The inclusion of Kim Eng into Maybank’ stable is deemed to have narrowed the competitive gap between Maybank and local arch rival CIMB Group Holdings Bhd when it comes to having a regional presence.

CIMB Group had acquired Singapore stockbroking firm GK Goh Holdings Ltd for S$239.14 million in 2005 , valuing the transaction at a then price-to-book multiple of 1.35 times. The acquisition was widely seen as the key platform that propelled CIMB Group into becoming a regional player, as it later built on and expanded its market reach in the region.

CIMB Group is also the major shareholder in Bank CIMB Niaga in Indonesia , and CIMB Thai in Thailand .

Maybank’s expansion is in line with the government’s Economic Transformation Programme (ETP), which aims to create more regional champions among Malaysian banks.

Under the ETP local banks are expected to increase their proportion of overseas income over total profits to 27% by 2020 from around 17% now through a greater presence in Asean and international markets.

Investors will closely watch Maybank’s regional transformation plans as the pieces fall into place following the series of strategic acquisitions in recent years, culminating in this latest purchase.