The diminishing Aabar factor

The central bank has ordered a cap on the voting rights of Aabar Investments PJS in RHB Cap to 15.

TWO days ago, a filing to the stock exchange by RHB Capital Bhd (RHB Cap) took the market by surprise. It said that the central bank had ordered a cap on the voting rights of Aabar Investments PJS in RHB Cap to 15%.

It was also revealed that RHB Cap is prohibited from issuing more than 15% of new shares to Aabar, which currently has a 21.09% stake in RHB Cap.

The statement alluded to the fact that this condition dates back to 2010 when the Ministry of Finance (MoF) gave its approval to Aabar to buy a 25% stake in RHB Cap.

This development is clearly new to the market.

This information was markedly absent from the offer document of the recently announced RHB Cap rights issue.

This in turn means that there is now a balance of over 6% of rights shares that do not have an entitled shareholder for them to be subscribed by . It isn’t clear how this ‘overhang’ will be solved.

It has been reported that Aabar has not given its commitment to subscribe to its portion of the rights issue, although that does not mean it would not buy into the rights.

In any case, the ruling, unless challenged, means that the significance Aabar can wield as a shareholder in RHB Cap has been dented.

In other words, despite being a 21.09% shareholder in RHB Cap today, it can only vote on 15% of those shares.

Aabar’s stake had been slightly diluted since 2010 mainly due to its decision to opt for cash instead of reinvesting its dividends under RHB Cap’s dividend reinvestment plan.

That is another indication of Aabar’s hesitation to pump more money into RHB Cap.

In April, RHB Cap announced a rights issue to raise RM2.5bil, which would bolster its capital base to meet Basel III and future growth requirements.

The rights issue has been approved by shareholders although it isn’t clear if Aabar voted in favour, opposed or abstained from voting on that decision.

RHB’s planned rights issue is seeking to deleverage its capital structure by issuing more equity at a time of an economic slowdown, a logical move no doubt.

However, going by Aabar’s track record, it has already been speculated that it isn’t keen on taking up this rights issue.

Aabar had bought its block of shares in RHB Cap from sister company Abu Dhabi Commercial Bank’ (ADCB) in 2011.

Aabar had acquired it for RM10.80 per RHB Cap share, valuing the bank then at 2.25 times book value.

ADCB had acquired the portion of RHB Cap’s shares earlier in 2008 at RM7.20 per share or 2.2 times book value.

If Aabar only subscribes to 15% of its entitlement for the rights, it would have to fork out some RM374.29mil for the 77.65 million new shares. It is likely that Aabar’s stake will be diluted to under 20% if the issuance is fully taken up.

Aabar has yet to give any undertaking to subscribe to the rights issue while both the Employees Provident Fund Board and OSK Holdings Bhd, the other substantial shareholders of RHB Cap, have provided written undertakings to subscribe in full for their respective entitlements.

If Aabar does not take up any of its rights entitlements, then it could potentially get diluted to as low as 17.5%.

Also, if that is the case, the issuers’ underwriters would have to deal with Aabar’s portion of the rights issue, which is made up of 545.78 million RHB Cap shares. That would amount to a total of RM2.6bil, going by the rights issue price of RM4.82.

Notably, the rights issue price is at a 20% discount to market.

Could this entice shareholders like Aabar, to buy into the rights issue and lower their cost of investment?

That is an unlikely scenario, points out a banker, considering that Aabar has not acquired more shares in RHB Cap since first buying into the company. “More importantly, Aabar can’t be too thrilled with the order issued by Bank Negara limiting their voting rights in RHB Cap,” he says.

This in turn leads to the question as to what will Aabar’s next move be?

Recall that it had been reported back when Aabar bought into RHB Cap that Bank Negara had imposed another condition on Aabar, namely that it must support the possible merger of RHB Cap with a local bank at a “market price” that would not weaken the merged entity.

Clearly this hints towards Bank Negara wanting Aabar to consider taking a lower price for its shares in the event a local banking M&A is on the cards. But that may mean Aabar would have to take a loss on its investment.