AFG’s no stranger to M&A talk, the latest surrounds DBS next step

  • Business
  • Saturday, 14 Jul 2012

RUMOURS of mergers and acquisitions (M&A) are nothing new in the region’s ever-changing banking landscape, but the proposal by Singapore’s DBS Group to take over PT Bank Danamon earlier this year rekindled some excitement about its plans for consolidation in Malaysia.

In April, DBS Bank Ltd, which is majority-owned by Singapore sovereign fund Temasek Holdings, made a general offer to acquire Indonesia’s Bank Danamon for US$7.24bil (RM23.1bil) at a rich 2.6 times book value.

DBS is essentially obtaining Temasek’s 67% stake in Bank Danamon by issuing new shares, alongside a cash offer of 7,000 rupiahs (RM2.37) per share for minority shareholders.

That offer was at a 52% premium to the bank’s then-market price.

The bid for Bank Danamon is seen as a crucial part of DBS’s strategy to stamp its mark as a powerhouse financial group in the region.

At present, DBS’s operations are centred mostly in Singapore and Hong Kong, which accounted for 62% and 19% of its net profit last year.

Touted as “The Safest Bank in Asia”, DBS has a network of some 200 branches and outlets and 18,000 employees, but this pales in comparison to Bank Danamon’s workforce of 70,000 and 3,000 branches.

The proposed acquisition, however, met with stiff and immediate resistance, followed by criticism from some Indonesians about the lack of reciprocity in bank ownership terms between it and neighbouring countries.

Foreigners were allowed to own up to 99% of Indonesian banks.

The Indonesian central bank promptly stepped in to announce that fresh regulations, which have not been finalised, may cap new investments by financial institutions in its banks at 40%, potentially scuttling DBS’ offer.

Going by the latest reports, Bank Indonesia could yet give its nod to the Bank Danamon buyout.

A deputy governer of the central bank was quoted as saying that ownership exceeding 40% might be allowed on a case-by-case basis, if the owner is a well-governed financial institution.

On home ground, DBS had in April received the green light from Bank Negara to begin negotiations with Duxton Investments Pte Ltd for the latter’s effective 14.2% stake in Alliance Financial Group Bhd (AFG), the country’s second smallest bank by market capitalisation.

Similar in nature to the Bank Danamon transaction, the aim here is for Temasek to transfer its equity in AFG to DBS.

Duxton Investments, together with Langkah Bahagia Sdn Bhd, a company linked to former finance minister Tun Daim Zainuddin, own a combined 29.06% stake in AFG via Vertical Theme Sdn Bhd, making it the bank’s single largest shareholder.

StarBiz reported previously that this transaction, should it be successful, would not result in DBS taking control of AFG, at least for the time being.

It was also reported elsewhere that DBS would not be forced to consolidate its 28%-owned Hwang-DBS (Malaysia) Bhd and AFG despite the rule barring a single party from holding a significant portion in more than one financial institution.

This is because Temasek was granted a special exemption by the Malaysian government when it bought into AFG in 2005, and DBS will inherit this flexibility to own shares in both Hwang-DBS and AFG.

Be that as it may, there has been no shortage of M&A talk concerning either Hwang-DBS or AFG.

Just last year, speculation emerged of a mega three-way merger between RHB Capital Bhd, AFG and DBS, followed by reports of a possible merger of Hwang-DBS and AFG, supposedly brokered by DBS.

Asked about the progress of negotiations between DBS and Temasek, an industry insider says: “The last I heard, the talks have concluded and the pricing is set. It is just a matter for the regulators now.”

In the meantime, analysts think AFG can leverage on DBS’ regional exposure as South-East Asia’s largest banking group and stronger balance sheet.

“AFG’s focus has been on consumer and SME (small to medium enterprise) loans. It could perhaps be more active on corporate and investment banking with DBS’ entry,” opines one analyst.

A few banking analysts feel DBS can help beef up AFG’s transactional, wealth management and treasury businesses, in line with its efforts to boost non-interest income.

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