Monday July 11, 2011

Will Temasek sell its AFG stake to DBS Group?

Corporate Portrait by Jeeva Arulanpalam

Pricing, red tape in the way

RUMOURS that Singapore state investment arm Temasek Holdings Pte Ltd is looking to sell its stake in Malaysia's Alliance Financial Group Bhd (AFG) have begun to make its rounds.

While Temasek seems to be keeping its cards close to its chest, investment bankers said a possible divestment in AFG might not be far-fetched given its recent divestment in two of China's biggest banks Bank of China and China Construction Bank. And the name that keeps coming to the forefront as a potential buyer of AFG is Singapore's biggest lender, DBS Group Holdings Ltd, of which Temasek owns 27.17% .

One reason for this was because DBS chief Piyush Gupta had said last year that the company's aim was to achieve a 40:30:30 revenue mix in the next five years for Singapore: Greater China: South and South-East Asia versus its 60:30:10 ratio presently. There are talks that the group may look at merger and acquisition (M&A) as opposed to organic growth to achieve its South-East Asia revenue target.

Credit Suisse, in a report earlier this year on DBS, said the company's two potential candidates in South-East Asia for a possible buyover were either Indonesia's PT Bank Danamon Indonesia Tbk or AFG.

The research report highlighted that Danamon was an ideal choice in terms of market and strategic fit for DBS for several reasons Indonesia is the only country in South and South-East Asia that allows 100% foreign bank ownership, making it the only choice for M&A in the region, and the country also provides the best structural stories in Asia.

“A sharply under-penetrated market that is growing fast, a young country with a sizeable population and a rapidly growing labour force and a strong fixed asset investment cycle. Banks earn some of the highest net interest margins in the world and deliver roughly 20% earnings growth. If DBS acquires Danamon, it would contribute 24% of revenues of the combined entity, which would help DBS achieve its geographical revenue mix target,” Credit Suisse analysts Sanjay Jain and Anand Swaminathan said in their report issued in January.

Aside from this, Temasek also owns a 67.36% stake in Danamon via Asia Financial Indonesia Pte Ltd, making an acquisition by DBS more plausible. However, DBS' Gupta has since shot down market talk that his bank was looking to buy Temasek's stake in Danamon.

Market observers have it that although Temasek has a stake in DBS, the latter's management is not willing to overpay for a bank purchase.

Therefore, it can be expected that a potential stake sale in AFG by Temasek to DBS may attract its fair share of challenges, with the top being pricing.

“We've seen potential deals in the local banking industry fall through over pricing, with the latest being RHB Capital Bhd and its two buyers CIMB Group Holdings Bhd and Malayan Banking Bhd. Being Singapore's top lender, it can be expected that DBS' management will take a disciplined approach in its acquisition and will not overpay,” said a local banking analyst.

Temasek and a local company, Langkah Bahagia Sdn Bhd, have a combined stake of 29.06% in AFG through investment vehicle Vertical Theme Sdn Bhd.

Vertical Theme is 51% held by Langkah Bahagia, a company believed to be linked to former finance minister Tun Daim Zainuddin, and the balance owned indirectly by Temasek. Thus, Langkah Bahagia's stake in AFG amounts to some 14.8% while 14.26% is indirectly held by Temasek.

Langkah Bahagia was reportedly keen to sell its stake in AFG.

An analyst said that AFG was a good takeover target at a price to book value of 2 times.

“But a wider industry range would be 1.8 times to 2.2 times, since EON Capital Bhd was taken over at 1.4 times book value while the recent stake sale in RHB Capital by Abu Dhabi Commercial Bank was done at 2.25 times price-to-book value,” she said.

AFG's price-to-book multiple was 1.5 times while its price-to-earnings multiple was 11.9 times as at March 31.

An industry source said another “spanner in the wheel” over a potential Temasek-DBS deal could come from Bank Negara, which is keen to widen the spread of foreign banks based in Malaysia.

With the second and third positions among foreign banks based in Malaysia occupied by Singapore-owned financial institutions, the local central bank may want to draw financial insitutions from other countries.

A quick check showed that as of March 31 this year, HSBC Bank Malaysia Bhd was the largest foreign bank by asset size in the local market at RM66.45bil, followed by OCBC Bank (Malaysia) Bhd at RM57.60bil and United Overseas Bank (Malaysia) Bhd at RM55.09bil. Standard Charted Bank (Malaysia) Bhd was at RM47.69bil and Citibank Bhd came in at RM40.82bil as at March 31.

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