Malaysia's CIMB-led bank merger more difficult after EPF vote barred

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KUALA LUMPUR (Oct 23): A decision by Malaysia's bourse to bar a key shareholder in CIMB Group Holdings Bhd and two other lenders from voting on their planned merger has given minority investors more clout and thrown doubt on the deal's prospects.

Seeking to create Malaysia's biggest bank with a market value of more than $20 billion, the three have proposed a complex deal structure widely seen as aimed at blocking potential objections from Abu Dhabi-based Aabar Investments - the second-largest shareholder in one of the lenders, RHB Capital Bhd.

The deal's success would have been all but assured if state pension fund Employees Provident Fund (EPF), which bankers have said is in favour of the merger, had been granted a waiver to rules that prevent it from voting because it has substantial stakes in all three banks.

The refusal to grant the waiver was seen as plus for corporate governance in Malaysia, but CIMB may now scramble to appease Aabar and other minority shareholders.

"Aabar will feel emboldened, particularly given the outright attempt to circumvent its interests," Kevin Kwek, a senior analyst at Sanford C. Bernstein, wrote in a research note, adding that the deal's valuations would likely be rejigged.

Kwek said the chances of the deal being dropped had also climbed but that he did not see it as the most likely scenario as CIMB had few options to grow bigger and Malayan Banking Bhd (Maybank) was likely waiting in the wings to woo RHB.


The EPF, which owns about 14.5 percent of CIMB, 41 percent of RHB and 65 percent of the third bank Malaysia Building Society Bhd, failed in its argument that the interests of its 14 million members were at stake.

"There are no adequate justifications that the potential conflict of interests involving EPF has been eliminated or sufficiently mitigated," a Malaysia Building Society statement quoted the bourse as saying.

Shares in all three banks were suspended on Tuesday pending the announcement. Trade will resume on Thursday as Wednesday was a public holiday in Malaysia.

The bourse was also quoted as saying that the EPF had had prior knowledge of the deal talks before they were disclosed. The EPF said in September that it had not been part of any of the discussions about the proposed merger.


There has been much market speculation that Aabar, which owns around 21 percent of RHB, will seek terms more favourable to itself. Aabar has repeatedly declined to comment on the merger.

With the EPF barred from voting, Aabar's voting rights increase to around 36 percent. If it joined forces with RHB's third-largest shareholder OSK Holdings Bhd, the two would have a combined voting power of 53 percent.

OSK Holdings, a small financial group built by veteran broker Ong Leong Huat, is involved in property investment and equity financing. OSK officials did not respond to requests for comment.

If the deal does go through, it would give birth to a banking group with assets totalling around $190 billion, surpassing Maybank and making it Southeast Asia's fourth-biggest bank.

Under the complicated structure submitted to the central bank for approval, RHB will issue shares to acquire the much larger CIMB but CIMB shareholders will own 70 percent of the merged entity.

According to Malaysian listing rules, RHB only needs to gain the approval of 50 percent of its shareholders if it is the acquiror. If CIMB bought RHB, then it would need to gain approval from 75 percent of the seller's shareholders.