Maybank or CIMB, EPF?

EPF has some tough decisions to make as CIMB, Maybank fight for RHB Capital.

THE Employees Provident Fund (EPF) will soon be in a happy predicament, if it is not already. That's because it will be negotiating to sell its 45% stake in RHB Capital to one of the two largest groups in the country Malayan Banking or CIMB Group.

It is a stake that EPF did not really want but nevertheless acquired after warding off other parties in a takeover battle in 2007. It did that to protect its interests in RHB Cap but ended up with majority control and in a a situation in which it controlled a large commercial banking group.

That's not a good position to be in because it is better that a provident fund should concentrate on fund management instead of managing a bank and all the problems and potential conflicts that come with it because the EPF is after all the largest player in the local capital markets.

Thus, the EPF cannot hope to be in a happier position than this where two of the largest banking groups in the country and among the largest regional players want to get their hands on RHB Capital.

That accomplishes three things for EPF immediately. First, it no longer has to involve itself in the running of a banking group. Next, if there is a share exchange involved, it offers it the opportunity to have a meaningful but not controlling stake in the largest Malaysian banking group, thereby allowing it to be a passive investor as funds should be. And finally, it can expect to get a fair deal and withdraw its investments in RHB Capital at a considerable profit.

Both Maybank and CIMB have been given Bank Negara approval to negotiate with RHB Capital and its major shareholders. Indications are that the preferred route that either banking group will take is the asset and liability method.

Under this, RHB Capital shareholder approval will be sought for the sale of the business. Under recently revised requirements, the sale will require the approval of 75% of shareholders, which means the deal cannot be done without EPF approval.

The other substantial shareholder of RHB Capital, with a 25% stake, isAbu Dhabi Commercial Bank or ADCB. ADCB wants to sell its stake and is already looking for buyers.

It would be prudent for it to wait to see how Maybank's and CIMB's offer pans out before it makes its mind up.

On the surface, it would seem logical that EPF (and ADCB) simply take the best offer and be done with it. That would be the right thing to do if the deal was going for cash.

But what would EPF do with all the cash that it would get more than RM10 billion? EPF would plausibly like to be invested in the enlarged entity via a share exchange, a smaller stake in a much larger bank with a strong regional presence.

If that is the case, then it has no choice but to consider who will make the better fit with RBH Capital in terms of the merger Maybank or CIMB. If it is a share exchange, valuations are unlikely to be very different.

It will be foolhardy to accept a proposal because the dowry is highest. Happiness, well-being and prosperity in the long-term will depend even more on the characteristics of the bride and the one who would be groom compatibility in other words. As in all marriages, one can never be sure.

That's why the EPF (and perhaps ADCB too) should not necessarily choose the higher bidder. And that's why Maybank and CIMB should not bid their prices up to astronomical levels and put the very merger itself at risk.

Lay down your reasonable bids and let the better, not necessarily richer, man win.

Managing editor P Gunasegaram is aware that most mergers and marriages don't work out the way they were intended.