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Hong Leong says Bank Negara has no objection for it to start negotiations with the board of EONCap and EON Bank.
Hong Leong Bank Bhd (5819) has obtained Bank Negara Malaysia's approval to start takeover talks with smaller rival EON Capital Bhd (EONCap).
The combination of Hong Leong, the country's sixth biggest bank by asset, and EONCap, ranked seventh among nine local banks, could potentially overtake RHB Capital Bhd as the fourth largest lender.
In an announcement to Bursa Malaysia yesterday, Hong Leong said Bank Negara had no objection for it to start negotiations with the board of EONCap and EON Bank.
Hong Leong already had earlier approval to talk to some EONCap shareholders.
Sources said EONCap had appointed Goldman Sachs as its adviser for the deal, while Hong Leong is advised by CIMB Investment Bank.
Kenanga Investment Bank is said to be advising several EONCap shareholders.
HL Bank to start talks with EONCap, EON Bank boards Written by Loong Tse Min
Thursday, 07 January 2010 11:28
KUALA LUMPUR: Hong Leong Bank Bhd (HL Bank) has obtained Bank Negara Malaysia’s (BNM) go-ahead to start negotiations with the boards of EON Capital Bhd (EONCap) and EON Bank Bhd for the potential acquisition of their assets and liabilities.
In a short statement yesterday, HL Bank said the central bank had, vide a letter dated the same day, “no objection” for it to start negotiations with the respective boards for the acquisition of the assets and liabilities, including EONCap’s interest in EON Bank.
In an earlier filing on Dec 17, HL Bank had said BNM had no objections for it to start negotiations with certain EONCap shareholders for the potential acquisition of the assets and liabilities, including equity interest in EONCap.
HL Bank’s potential takeover of EONCap, which surfaced at the tail-end of last year, is expected to be contested by high-powered private equity outfit Primus Pacific Partners (HK), which has a 20.2% stake in EONCap.
Analysts have said Primus has a reputation of being a long-term strategic investor and had a high entry cost of RM9.55 per share when it spent RM1.34 billion to acquire its 20.2% stake in June 2008.
EONCap closed up five sen at RM6.85 yesterday.
Primus has so far kept mum.
At the same time, Malaysian corporate notables, Rin Kin Mei and the family of Tan Sri Tiong Hiew King with respective stakes 15.46% and 17.11% in EONCap are said to be supportive of HL Bank’s intentions.
It has been reported just prior to last Christmas that HL Bank has gained the support of national investment agency Khazanah Nasional Bhd, which holds a 10% stake in EONCap.
The takeover bid may pit Tan Sri Quek Leng Chan of Hong Leong group against Ng Wing-Fai, the co-founder and managing director of Primus.
Ng, who was the senior executive vice-president and corporate strategy head in Taiwan-based Fubon Financial Group, had in 2003 tangled with Quek in a tussle for ownership of International Bank of Asia (HK) (IBA).
Fubon ultimately took control of IBA with a 55% stake with Hong Leong group said to have lost out due to pricing.
In 2006, the Fubon group and Hong Leong were again in competition to acquire Hong Kong’s Asia Commercial Bank Ltd (ACB).
Several other banking groups were also vying for ACB and Public Bank Bhd made the ultimate winning bid, with ACB now renamed Public Bank (HK) Ltd.
This article appeared in The Edge Financial Daily, January 7, 2010.
Saturday January 9, 2010 Tussle over EON Cap
Stories by YAP LENG KUEN
FRESH into the new year, the sour relations between two major shareholders of EON Capital Bhd – Primus Partners (HK) Ltd and Rin Kei Mei – has erupted into a battleground for control.
Even as EON Cap is still strengthening its capital base and transformation process, Rin has decided to “throw in the towel’’ by grouping up with another major shareholder Tan Sri Tiong Hiew King to consider selling off a combined 31.7% stake to Hong Leong Bank Bhd. Thrown into the package is Khazanah Nasional Bhd’s 10% stake – bringing the larger combined stake under negotiations to 41.1%. The Employees Provident Fund (EPF), an institutional investor in almost every bank, has a 10.7% stake in the banking group. The total stake of these four investors comes up to 51.8%.
Primus owns 20.2%. EPF will make its decision on Hong Leong’s yet-to-be submitted proposal to buy the assets and liabilities of EON Cap purely as an investor, bearing in mind, that it is also a majority shareholder of Hong Leong Bank and other banks.
The advantage that Hong Leong has is that it is likely to bid for the assets and liabilities of EON Cap. That means it does not have to make a general offer. If a simple majority of shareholders vote to sell the assets and liabilities of EON Cap, the deal is done. The billion ringgit question is at what price will the major shareholders accept Hong Leong’s offer.
Primus appears to be deliberately keeping its cards close to its chest. Sources say it is not pleased by the turn of events, more so because it was caught by surprise when news of the potential stake sale was announced. But the bigger issue really is that having bought EON Cap at RM9.55 per share or at 55% premium (above the market price then of RM6.20) in early 2008, Primus would be mindful of any proposal that values the banking group at below that price.
At what price?
Like many other banking stocks, the recent financial crisis triggered by the US subprime mess had weighed heavily on EON Cap shares, sending it to a low of RM3; on the back of news of a potential takeover in recent weeks, the stock has risen significantly to a high of RM7 (on Friday).
Hong Leong, it is believed, is looking at an offer price of RM6 per share or slightly more than one time (1x) book value, a level that has sparked off strong protests from banking analysts as well as Primus, no doubt.
“A lot of strategic partnerships – Temasek/Alliance Financial Group; Bank of East Asia/Affin Holdings Bhd and EPF/RHB Capital Bhd – were done above one time book value. (The exception was Primus that bought its stake in EON Cap at more than two times book value).
“But those involving mergers or other forms – CIMB Bank Bhd merger with Southern Bank Bhd; privatisation of AmInvestment Group Bhd (AIGB) by AMMB Holdings Bhd; privatisation of CIMB by Bumiputra-Commerce Holdings Bhd and RHB Cap’s purchase of RHB Bank from Khazanah Nasional Bhd – were done at above two times book value,’’ a banking analyst points out.
Among the more recent deals, the Australian and New Zealand banking group (ANZ) had bought AMMB at 1.7 times book.
So, why should EON Cap be “sold cheap”, they question?
Even at the height of the financial crisis, Malaysian banks were not trading cheaply. EON Bank made a net profit of RM217.1mil for financial year (FY) ended Dec 31, 2007, and RM133.8mil for FY08; its return on equity is not very high but targeted to reach 15% in three years.
“The new senior staff they have recruited from various banks are high performers and will be out there to realise their aspirations,’’ says the analyst, adding that he will not be surprised if the bank manages to double its profits in five years.
“One can’t expect to pay just slightly over one time book value, and assume full management control,’’ scoffs another analyst.
“There are probably bankrupt companies on the cheap but there are no bargains in the Far East. There could have been at one time in the United States and Europe, where even the 100-year-old Lehman Brothers fell.’’
Divergent interests
Hong Leong’s Tan Sri Quek Leng Chan had sold 80% of his Hong Kong-based Dao Heng Bank Group Ltd to Singapore’s DBS Bank for HK$41.9bil cash windfall, via his overseas flagship Guoco Group Ltd. Reports estimate Guoco to be sitting pretty on RM18.9bil cash.
Doesn’t he have to spend it some day and why is he still so tight-fisted?
Analysts point out that Hong Leong Bank has been consistently paying out 24 sen dividend per share over the last five years even though its profit had doubled.
“If it doesn’t buy anything over the next two years, it will have to return that money to shareholders,’’ says an analyst.
Initially, market expectation for the takeover price was not exceeding 1.3 to 1.4 times book value or RM6.50 to RM7. That expectation is now raised to not more than 1.5 times or RM7.50.
Even if Rin and Tiong had bought their shares way below the so-called RM6 offer price, many regard it as a giveaway to sell below market price.
On the other hand, while Khazanah which already owns 28.4% in CIMB Bank, may want to rationalise its bank holdings it will still not give in to just any price or scheme.
The push factors would include the fact that EON Cap is trying to restructure but many others such as CIMB and Alliance Banking groups have gone way ahead.
Some analysts also view that EON Cap does not have a strong market share or a significant franchise in lending and deposit taking.
“Besides the pressure to top up capital, more investments are required in branding and information technology.
“From the reports surfacing, one gets the impression that different shareholders seem to want things run in different ways, which makes it difficult to see a smooth uptrend ahead,’’ says an observer.
But that does not necessarily entail selling on the cheap although it may not be easy to find a good buyer with solid cash and background in the same industry.
Going gets tough
The scenario for banks in Malaysia is not expected to get any easier, particularly post financial crisis. Observers speculate that this could be another reason behind Rin and Tiong’s decision to exit the bank (apart from the widely known hostility between them and Primus). As seasoned businessmen, they may be able to see the threats looming in the horizon which may also involve coughing up more money to beef up the bank’s capital position.
Scale and size will matter even more. While Malaysian banks are going regional, EON Cap, which has similar aspirations is still rather domestic centric and may end up playing a catch-up game.
There is also a sense that Primus had done a few misteps that were not highly favoured by the central bank. For instance, Primus had failed to honour its subscription of a large bonds-cum-warrants issue, proceeds of which would have been used to redeem a US-dollar subordinated debt.
Subsequently, some analysts worry how the authorities might view Primus, whose subsequent warrant issue was rejected by Bank Negara, if this Hong Leong deal does not go through.
Quite clearly, Bank Negara would like to see further consolidation in the sector even as it hands out licences to world class foreign and Islamic banks, a move many regard to be a subtle message to local banking groups to buck up.
What could happen
Over the week, Hong Leong received the nod from the central bank to start talks with the boards of EON Capital and EON Bank. (EON Cap wholly owns EON Bank) to acquire its assets and liabilities. Sources say the pricing depends on various factors. For one, it depends on the deal structure – will it involve a total cash or share transaction (this may be unlikely as it may bring to rise dilution concerns)? Or a cash and/or share transaction?
“There are shareholders who may prefer to swap their holding in EON for exposure to the enlarged Hong Leong group. They may prefer that than to exit altogether. So, the deal may likely involve a cash/share deal,” says an analyst.
When CIMB launched a takeover for Southern Bank Bhd (SBB), it used a similar assets and liabilities route that had a share exchange offer where SBB shareholders were allowed to receive shares, if they chose to.
The advisors for Hong Leong for this deal is CIMB. Details on the offer may emerge over the next week or so.
Hong Leong’s plan, which involves the purchase of assets and liabilities, requires a 50% approval from shareholders plus one share, which may mean that the deal can go through even without the support of Primus. Collectively, Rin, Tiong, Khazanah and EPF own 52.4% in EON Cap and if these four parties agree to accept the offer put forth by the Hong Leong group (or any other, for that matter,) it is very much a done deal.
Yet, industry observers say Primus can still frustrate the deal by dragging the process, given that it exerts significant influence on the board of EON Cap. And the premise may even be justifiable – the board should hold out for a better offer.
What is imperative however, says an observer, is that ultimately, even if the board is split on the deal, the offer ought to be put to shareholder vote: “The board is free to make their recommendation. This is why they hired Goldman Sachs and Ethos & Company. But ultimately, shareholders ought to be given a chance to express their views on the deal.”
“If for some reason, the board of EON Cap decides not to put the takeover bid up to shareholders to vote, all is not lost. Shareholders having 5% of the shares can call for an EGM to remove the board,’’ says a banker.
“But that’s a messy route and is not likely to happen ...,” he adds.
THE Sarawak Bank Employees' Union (SBEU) said it is against the proposed Hong Leong Bank (5819) takeover of EON Bank claiming that the exercise will result in reduced bank branches in Sarawak and job cuts.
"SBEU is concerned on the adverse impact of the proposed takeover given that both banks originate from Sarawak," its chief executive officer Andrew Lo said in a statement released in Kuching yesterday.
Lo said SBEU is not convinced that the merger will bring any long-term benefits to the new bank or its clients.
"Mergers do not necessarily bring about improvement in efficiency.
"Those who assert that there will should demonstrate them before they are allowed to merge. We (the union) have evidence that there is no clear link between bank mergers and improved efficiency," Lo said.
He said cost-savings resulting from mergers are often confused with efficiency gains.
Lo added branch closures and job cuts will have a negative impact and social cost to employees and the public.
"Our concern is that in the drive to quickly realise the costs of the purchase, a bank will close down many branches in order to show quick cost-saving returns," he added.
Lo said his experience had also shown that Hong Leong Bank had in the past been "aggressive in closing down branches" in rural Sarawak.
The Government's investment arm has received nod from Bank Negara to start talks with Hong Leong Bank to sell its stake in EON Capital, says Khazanah chief Tan Sri Azman Mokhtar.
Khazanah Nasional Bhd, the government's investment arm, has started negotiations to sell its 10 per cent stake in banking group EON Capital Bhd (EONCap) to Hong Leong Bank Bhd.
Managing director Tan Sri Azman Mokhtar said Khazanah had received Bank Negara Malaysia's approval to begin talks with Hong Leong Bank.
"We have started talks. It's not a strategic stake for us. We have no board representation. Our considerations will be purely commercial," he told reporters at Khazanah's annual review in Kuala Lumpur yesterday.
He said it was still too early to say when an agreement over the price and terms would be reached as other parties were also involved.
Hong Leong, the country's sixth largest bank by asset, is also talking to other shareholders of its smaller rival, such as Rin Kei Mei and Tan Sri Tiong Hiew King who indirectly hold a 31.7 per cent stake in EONCap through their respective private companies.
Azman said Khazanah will continue to divest other non-core assets this year. "We will do orderly divestment of non-core and non-competitive holdings."
He guided that the firm may make between RM3 billion and RM3.5 billion worth of divestments this year, based on the trend in the last five years.
Azman declined to identify the target companies, but said the timing of the divestments would depend on market conditions as Khazanah was in no rush.
The divestments are in line with the government's plan to boost liquidity of shares in the stock market.
Last year, Khazanah completed eight transactions totalling RM3.1 billion, locking in estimated gains of RM1.2 billion. They included divestments in Tenaga Nasional Bhd and Malaysia Airports Holdings Bhd.
It did more in 2008, completing nine transactions worth RM6.2 billion, with gains of RM2.2 billion.
The board, however, has yet to decide when it will write in to get Bank Negara's approval to start discussions with Hong Leong
THE board of EON Capital Bhd (EONCap) (5266) has in principle agreed to takeover talks with bigger rival Hong Leong Bank Bhd and to search for alternative bids after a meeting yesterday, sources said.
But the board has yet to decide when it will write in to get Bank Negara Malaysia's approval to start discussions with Hong Leong.
Business Times learnt that the seven directors of EONCap met for the first time yesterday since Hong Leong, the country's sixth biggest bank by asset, obtained last week the regulator's nod to start the takeover talks.
Under local banking laws, both parties are required to secure the regulator's consent before any merger or takeover talks can start.
The combination of Hong Leong and EONCap, ranked seventh among nine local lenders, would replace RHB Capital Bhd as the country's fourth largest lender.
Hong Leong had earlier obtained approval to talk to major EONCap shareholders - Singaporean Rin Kei Mei and businessman Tan Sri Tiong Hiew King, who together control 31.7 per cent of the smaller lender.
Khazanah Nasional Bhd, which owns 10 per cent, confirmed yesterday that it, too, has started preliminary discussions with Hong Leong.
The only resistance that may potentially stall the deal is widely expected to come from Primus Pacific Partners Ltd, a Hong Kong investment fund which had paid a hefty RM9.55 apiece for its 20.2 per cent share in EONCap.
Shares of EONCap have risen 6.5 per cent since the takeover news first surfaced middle of last month. The stock closed at RM7.01 yesterday.
EONCap has appointed Goldman Sachs as its international financial adviser, and Ethos & Co its local adviser to assist the group's strategic review.
