Wednesday, January 06, 2010

EON Capital's Fortunes In The Coming Weeks

Business Times, SINGAPORE, Jan 5 — Doubts are surfacing over a possible merger between Hong Leong Bank and EON Bank that would create Malaysia’s fourth-largest bank with assets of RM110.5 billion.

In late December, Hong Leong Bank, which is controlled by the reclusive tycoon Quek Leng Chan, told the stock exchange that it had received Bank Negara Malaysia’s permission to start negotiations with “certain shareholders” of EON Capital to acquire an interest in its smaller rival.

Listed EON Capital wholly owns EON Bank. EON Capital’s largest shareholders are businessman Rin Kei Mei and Sarawak billionaire Tiong Hiew Khiing, who collectively hold 33.2 per cent of the financial firm. Other shareholders include Hong Kong-based investment fund Primus Pacific Partners (20.2 per cent), the Employees Provident Fund (12.1 per cent) and state investment agency Khazanah Nasional (10 per cent).

The sticking point could be price. Local news reports, citing sources, have said that Quek would be willing to pay between RM5.50 and RM6 per EON Capital share, which would value the bank at one-1.2 times book.

“A previous attempt several years ago stalled over pricing: Mr Quek is not known to pay more than what he considers fair.’

But officials familiar with Rin and Tiong said that they would expect at least RM8-8.20 a share, which would value the bank at almost 1.6 times book. There is no certainty that a deal will be struck, as this is not the first time Hong Leong Bank has eyed EON Capital. A previous attempt several years ago stalled over pricing: Quek is not known to pay more than what he considers fair.

So far, nothing has happened as Quek is said to be abroad. The Star newspaper, citing sources, said yesterday that the Employees Provident Fund and Khazanah are ‘believed’ to have exited from EON Capital. But a government official denied this.

“We haven’t received any offer so far,” he told BT.

It is also not clear where Primus would stand. Three years ago, the investment fund bought into EON Capital for a hefty RM9.55 apiece – a price Quek would probably consider astronomical. And the opposite could be said about Quek’s speculated buying price — RM5.50-6 — as far as Primus is concerned. Indeed, there is talk that Primus is approaching other funds to make a rival bid for EON Capital. According to The Star, the fund approached Singapore’s Temasek Holdings.

In theory, this makes sense. Temasek manages Malaysia’s smallest bank, Alliance, so aligning with Primus could pave the ground for an ultimate merger between EON Bank and Alliance Bank. But the Singapore investment agency has not commented publicly on The Star’s story.

What is clear is that Malaysia’s central bank would encourage a merger. Indeed, the move towards a possible merger reflects Bank Negara’s wish to winnow the Malaysian banking sector to a few large banks, to better withstand increased foreign competition starting this year. Malaysia now has eight local banks. — Business Times Singapore

My Take: The local media seems to be a lot more excited and certain that the deal will go through. My view is that Quek wants this deal as it seems that he will NOT be able to get the Public Bank under his wings - pricing for PBB and the size may have been the obstacles to getting PBB (please read my posting on CIMB-PBB).

Quek cannot afford not to buy another bank as that would mean some other bank getting a lot bigger when the dust settles. I do agree its a matter of pricing. If its below RM6.00 as the article above stated, I am very sure the owners would not sell. Its a sellers' market, not a buyers' market.

The angle which many have not paid sufficient attention to is the Primus block, which had a high entry price. I am certain they would have approached Temasek, which controls AFG (Alliance Bank). Please read my posting on AFG to get a grasp on their side of things.

Hence it is clear that Bank Negara would NOT want a sovereign wealth fund to be owning a Malaysian bank. It looks increasingly likely that DBS Bank will be asked to take over the stake, as its the only Singapore bank that still do not have a banking presence in Malaysia. Would Bank Negara frown on that? Not really as both sides are opening up.

Would Bank Negara frown on DBS Bank taking over AFG and bidding for EON Cap at the same time? I really don't think so. If indeed DBS Bank is taking over AFG, then it would also make sense to bid for EON Cap - not that they really need to. Of course DBS Bank could come in and bid for EON Cap first before swallowing AFG. I doubt very much that Temasek will be allowed to bid for EON Cap as I am certain Bank Negara do not want that to happen when they are trying to get Temasek to divest AFG.

If DBS Bank gets approval, watch EON Cap fly. Quek can wait for a better price but he cannot afford to wait till DBS Bank or some other bidder comes into the fray, and end up engaging in a price war. On balance of the above, I think Quek will try and make a deal soon, closer to RM8 and not closer to RM6.

Just my dua sen...

p/s photos: Devon Aoki

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