CIMB, RHB Said to Weigh Revising $12.9 Billion Merger Terms

CIMB Group Holdings Bhd. and RHB Capital Bhd. are considering changing the terms of a proposed $12.9 billion merger that would create Malaysia’s largest banking group, people with knowledge of the matter said.

RHB investors may oppose the all-stock deal after CIMB shares tumbled 24 percent as of today’s close since the transaction was announced in October, said the people, who asked not to be identified because the deliberations are private. RHB shares dropped 14 percent in the same period.

The banks may need to renegotiate terms of what could become the nation’s biggest-ever merger after both reported lower earnings in the most recent quarter. The Malaysian stock exchange has ruled that RHB’s largest shareholder, Employees Provident Fund, can’t vote on the deal, making it more important to convince other investors of its merits.

Including the proposed acquisition of smaller lender Malaysia Building Society Bhd., the deal would be valued at 53.6 billion ringgit ($15 billion), data compiled by Bloomberg show. Lois Kam, a spokeswoman for RHB, said by e-mail there is “no new development” to announce at this time. Effendy Shahul Hamid, chief marketing and communications officer at CIMB, declined to comment when contacted by phone.

‘Mega-Islamic Bank’

The proposed transaction was structured as a reverse merger, with smaller RHB to issue shares to acquire CIMB, Malaysia’s largest bank. That method was seen as a way to overcome potential opposition from RHB’s second-largest shareholder, Aabar Investments PJSC, which paid 10.80 ringgit a share when it bought its stake in 2011.

The steeper drop in CIMB shares means the transaction has gotten less favorable to RHB investors. The companies are now discussing whether terms of the merger will need to be changed, and no final decision has been made, the people said. The transaction is still pending approval from Malaysia’s central bank. The banks are expected to complete due diligence on the deal by the end of January, the people said.

The proposed combination would see RHB issue one share for every 1.38 CIMB shares, according to an Oct. 9 statement. At the time, the merger valued CIMB at 7.267 ringgit a share, a stock exchange filing showed. CIMB closed today at 5.29 ringgit in Kuala Lumpur.

As part of the deal, CIMB will acquire Malaysia Building Society’s business at a fixed price of 7.8 billion ringgit and create a “mega-Islamic bank,” according to the October filing.

Weak Momentum

Malaysia’s stock exchange ruled in late October that pension manager Employees Provident Fund can’t vote on the deal. The fund is RHB’s largest investor with a 40.9 percent holding, and also owns stakes in CIMB and Malaysia Building, data compiled by Bloomberg show.

CIMB said in November its third-quarter profit fell 16 percent to 890 million ringgit, hurt by higher loan impairments in Indonesia. RHB’s net income for the period slipped 2.5 percent to 545 million ringgit. CIMB’s own banking analyst, Winson Ng, in December recommended investors to be “underweight” on bank stocks. He said in a research report that “weak loan momentum” and narrower margins would hurt revenue growth.

Potential provisioning differences have been uncovered during due diligence for the merger, the Edge reported last month, citing unidentified people. Malaysia Building Society has different provisioning standards as it didn’t come under the central bank’s purview up until last year, the newspaper said.

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