Tussle over EON Cap

Saturday January 9, 2010
Tussle over EON Cap

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.

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Merger with EON Bank will put HLB on 4th spot

Saturday January 9, 2010
Merger will put HLB on 4th spot

THE potential “marriage” between Hong Leong Bank Bhd (HLB) and EON Capital Bhd (EON Cap) will help to boost the former’s growth domestically and put it in a stronger competitive position in the face of liberalisation.

The merger will catapult HLB into the fourth largest bank in terms of assets in the country from its current sixth position.

The scale and size will also provide HLB with greater financial muscle to meet its aspirations as a regional player.

On the homefront, HLB will end up with a wider deposit-taking and loans franchise via a network of 338 bank branches nationwide (HLB and EON Cap currently has 199 and 139 bank branches respectively).

It will also enable the group to achieve better economies of scale in certain areas such as CASA (current account savings account) deposits, hire purchase (HP) and mortgages thus providing better pricing for consumers.

For individual segments, EON Cap has an estimated market share of 8.1% in the auto loan segment, while HLB’s is about 4.0%.

On a combined basis, the merger will raise the auto loan market share to a substantial 12.2%.
TA Research notes that EON Cap can help boost HLB’s small and medium enterprise (SME) business, which had not been growing very significantly over the past year.

HLB’s market share in the SME segment currently stands at a paltry 2.5% while EON Cap has around 4.8% of the industry’s total SME loans as at Sept 30, 2009.

In addition, AmResearch estimates that HLB’s market share of residential mortgage will be lifted to 10.3% from 7.1%.

“HLB’s profile of loans in terms of variable versus fixed rate loan will be rebalanced to 65.8% variable rate loan from the high of 75.6% currently,” it notes.

HLB’s current share of the local deposit market is 6.3%, but with this merger it will be boosted to 9.4%.

In terms of non-performing loans (NPLs), EON Cap’s transformation exercise which started in mid-2007 has helped to reduce its NPLs.

The group’s kitchen sinking exercises have resulted in a lower net NPL of 2.5% in the third quarter of 2009 (3Q09) versus 4.2% in 4Q07 and loan loss cover raised to 84.9% in 3Q09 (4Q07: 58.1%).

This will help to ensure that HLB’s asset quality, said to be one of the best in the banking sector, is not compromised.

ECM Libra points out that loan loss provisions have hardly made a dent in HLB’s earnings every quarter as it remains relatively small - RM162mil for financial year ended June 30, 2007 (FY07), RM159mil for FY08 and RM190mil for the nine months ended Sept 30, 2009 - in comparison with its total loans portfolio of over RM35bil.

“HLB’s net NPL ratio continues to improve, falling to 1.22% in the first quarter ended Sept 30, 2009 from 1.34% in the fourth quarter ended June 30, 2009, an achievement made all the more remarkable given the tepid growth in its loans book,” ECM Libra says.

EON Cap’s liquidity appears to be rather tight with a loan-to-deposit (LD) ratio in excess of 96% while HLB’s LD ratio hovers around 55%, the lowest in the industry.

The merger will help boost HLB’s low LD ratio which has resulted in a weakening in net interest income in recent quarters as well as EON Cap’s loans growth which is limited by its high LD ratio.

That said, OSK cautions that EON Cap’s inferior capital position and liquidity ratios will dilute HLB’s superior capital ratios.

Moreover, EON Cap’s weaker asset quality can give rise to a potential increase in NPLs and provisions, it notes.

Some analysts opine that apart from the kitchen-sinking of non-performing loans, EON Cap’s transformation programme had not improved its market positioning and franchise strengths.

“HLB’s transformation programme has worked very well for it. Given time, EON Cap’s transformation may be just as good especially if the merger takes place,” an analyst reckons.
HLB’s Business Transformation Programme which started in 2004 was a success and had helped the bank to make its first billion in pre-tax profit in FY08 as well as reduced NPLs.

The programme which focused on sustainable profitable growth scaled up the bank’s infrastructure and foundation and developed new capabilities.

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More competition and new entrants with financial liberalisation

Monday January 4, 2010Tougher year for insurers
More competition and new entrants with financial liberalisation

PETALING JAYA: Insurers in the country are bracing for tougher competition this year with more players joining the race for a slice of the growing domestic insurance business.
The liberalisation of the financial services sector announced earlier this year is expected to result in new entrants to the market until 2011.

With this in mind, existing insurers are aggressively strategising to grow their businesses amid rising competition.

Some of the areas of focus are agency, bancassurance and niche products. Prudential Assurance Malaysia Bhd (PAMB), among others, is expanding the number of its bumiputra agents to further penetrate the bumiputra market which it views as a potential growth area.

Chief executive officer Charlie E. Oropeza said that with more bumiputra agents on board, the company would be able to boost its takaful as well as its conventional business.

In an interview with Starbiz, he said between 15% and 20% of Prudential’s business at present was derived from takaful or Islamic insurance.

PAMB hoped to double its bumiputra agency force to about 3,000 by end of 2009 from the 1,500 in 2008.

Oropeza said the company would not compromise on the quality of its agents as the company increased their numbers.

In this regard, PAMB has been training its agents to become wealth planners so that they advise their clients based on their needs and risk profiles instead of merely selling products.
He described the bumiputra market as lucrative but underserved.

“More than half the population in the country consist of bumiputras and penetration rate of insurance for this segment is in a single digit range. We will also be opening up branches in areas where we see there is potential market for Bumiputras,’’ Oropeza said.

PAMB currently has a total agency force of 11,000, of which about 3,000 are bumiputra agents.
The company had recruited between 4,000 and 5,000 new agents this year, and plans to take in the same number next year.

The insurer has 39 branches nationwide, including East Malaysia.

Bancassurance is another area in which Oropeza hopes to expand with the right partners.

At the moment, Standard Chartered Bank Malaysia distributes PAMB’s insurance products.

Oropeza is confident that PAMB would be able to perform better next year compared with this year.

The insurer’s full year results for 2009 would be out in February.

One of the areas that would boost profitability going forward would be from investment-linked funds, he said.

Prudential’s conventional investment-linked business grew 27% to RM295mil in the first nine months, which was one of the highest in the industry despite the unfavourable economic climate.

Koh Yaw Hui, the CEO of Great Eastern Life Assurance (M) Bhd, the largest life insurer in Malaysia, said the company would be adopting a multi-distribution strategy to reach out to different customer segments.

He added that more focus would be put on the tied agency channel as it was the most dominating channel contributing to more than 80% of the insurer’s business.

Great Eastern currently has about 17,000 agents.

In terms of asset size, Great Eastern is the largest with close to RM40bil, with a base of more than 2.8 million policyholders.

“We will focus on improving the professionalism, leadership and selling skills of our agents in line with our Agency Transformation Programme initiated in 2008.

“Our goal for 2010 is to attract at least 50% of new recruits from graduates and professionals out of the additional 5,000 target set for our agency force,” Koh said.

To beef up its bancassurance business, the company has tied up with OCBC Bank to distribute its products. Moving forward, Koh said he expected this channel to contribute “handsomely” to the company’s overall business.

Apart from this, he added that the company was currently considering opening new branches at various strategic locations.

Great Eastern is also looking at the underserved segment of the younger population and new entrants to the job market with a lower disposable income.

Koh said the company has designed unique products to cater to this segment’s needs, including providing critical illness/medical coverage and long-term savings products starting from as low as RM100.

Great Eastern is targeting double-digit growth next year.

“Up to the third quarter (2009), our total weighted new business premium has grown by 17%,” he said.

“We are very confident in meeting our goals of RM800mil in total weighted new business premiums set for 2009.”

http://biz.thestar.com.my/news/story.asp?file=/2010/1/4/business/5325061&sec=business

EPF, Khazanah exit EON Cap

Monday January 4, 2010

EPF, Khazanah exit EON Cap
Move likely to end with Hong Leong Bank in control

PETALING JAYA: Institutional investors, Khazanah Nasional Bhd and the Employees Provident Fund (EPF), are believed to have agreed to sell their combined 20.7% stake in EON Capital Bhd, sources told StarBiz.

This followed an earlier decision by two major shareholders – Rin Kei Mei and Tan Sri Tiong Hiew King – to seek permission to negotiate with Hong Leong Bank for the sale of their combined indirect stake of 31.7%.

“The pending deal for Hong Leong Bank’s proposed buyout of EON Capital Bhd seems to have reached a tipping point,’’ a source said. “The move of placing an additional 20.7% of EON Cap shares, on top of the combined indirect 31.7% held by Rin and Tiong, into Hong Leong’s hands would appear to seal EON Cap’s fate of being absorbed into an enlarged Hong Leong banking group.’’

The potential merged entity of Hong Leong Bank and EON Cap will create Malaysia’s fourth largest bank after Malayan Banking Bhd, CIMB Bank and Public Bank.

The sale by Khazanah and EPF of their respective stakes in EON Cap to Hong Leong will not come as a surprise to market watchers, given that the two state institutions have long mulled rationalising their bank holdings.

Khazanah and EPF already have a 28.4% and 57.5% respectively in CIMB Bank and RHB Capital Bhd.

According to a source familiar with the takeover bid, Hong Leong’s offer is likely to be pegged at RM5.50-RM6 per share.

“Khazanah and EPF are making this move to be in step with the larger government agenda of inducing market-driven consolidation of the banking sector, which many see as still lacking in scale and capital to meet the challenges of the next decade,’’ the source commented.

So far, Hong Leong Bank has approval from Bank Negara to negotiate with Rin through his private vehicles – Kualapura (M) Sdn Bhd and Lintang Emas Sdn Bhd – and Tiong via RH Development Corp Sdn Bhd.

Hong Leong is also believed to have asked for permission to talk to EON Cap as an institution, and not to individual or targeted shareholders, on its proposed takeover.

That approval is said to be still pending.

It is believed that the board of EON Cap, which met on Thursday, was advised to seek approval to negotiate on an institutional level with Hong Leong Bank on the latter’s proposed buyout offer.
Primus Partners (HK) Ltd, the private equity firm that had bought 20.2% of EON Cap at RM9.55 per share or RM1.34bil, is said to be very sore at the turn of events which involves an offer price from Hong Leong that values EON Cap at less than 1.3 times book value. The stock closed at RM6.84 on Thursday.

Primus, according to sources, is suggesting that it is better to go to the open market where EON Cap may fetch a higher counter bid and minority shareholders may also get a better deal.
Last week, StarBiz reported that Primus was believed to have approached Singapore’s Temasek Holdings Ltd for a joint-bid potentially through the Alliance banking group, in which Temasek holds 29.27%.

Some observers said the proposal was likely to be put to shareholders for their vote.


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