Friday July 15, 2011

Singapore's DBS’ challenging entry into Malaysia


PETALING JAYA: One of the challenges facing DBS Group Holdings Ltd's possible entry into Malaysia's Alliance Financial Group Bhd (AFG) is the high price it may need to pay to buy out the Malaysian party in the holding company that controls 29% in AFG, according to banking sources familiar with the situation.

Singapore investment firm Tema-sek Holdings owns 49% in Vertical Theme Sdn Bhd, the holding company that owns 29% in AFG. The other 51% in Vertical Theme is held by local firm Langkah Bahagia Sdn Bhd, believed to be linked to former finan-ce minister Tun Daim Zainuddin.

It has already been speculated that Temasek may hive off its stake in AFG to DBS, Singapore's biggest lender, to pave the way for the latter's entry into the Malaysian market. Also, earlier this year reports indicated that Langkah Bahagia was looking to sell its interest in AFG.

Temasek declined comment on the issue while a DBS spokesman in his response to StarBiz queries said: “As always, strengthening our existing operations and growing our business organically remain our top priority. We don't as a policy, comment on market speculation.”

“DBS' entry into AFG is work in progress. Of course Temasek and Langkah Bahagia will have to agree on pricing, which is something that is never easy, as past banking M&As in Malaysia have highlighted,” said an investment banker.

Temasek or DBS would need the approval of Bank Negara to begin talks with Langkah Bahagia. Further-more, under the Banking and Financial Institutions Act, institutions have to obtain special approval from Bank Negara to own more than a 20% stake in a domestic financial institution.

Temasek first came into AFG as a shareholder in 2005 after it acquired a controlling stake, together with Langkah Bahagia.

Sources, however, said that neither Temasek nor DBS had sought Bank Negara's nod for this, indicating that the deal is still in its early stages.

But another industry source said that Langkah Bahagia might not be too difficult to deal with. “Langkah Bahagia's entry into AFG was at a low cost. I don't think there would be too much of haggling on pricing on their part. There could be other challenges to DBS' entry into Malaysia,” he said.

According to this source, one of those challenges included the possibility that Temasek and DBS themselves might not have come to an agreement on the matter.

The source cited the case of PT Bank Danamon Indonesia, where Temasek owns close to 68%. It had been speculated that Temasek might sell its stake in Danamon to DBS and Credit Suisse in a report had highlighted that Danamon was an ideal choice for DBS in terms of market and strategic fit. Incidentally, Temasek had recently divested two of China's biggest banks Bank of China and China Construction Bank leading to speculation that it could exit Danamon and AFG. However, DBS' top management had since shot down market talk that the bank was looking to buy Temasek's stake in Danamon. It has been reported that market observers had it that although Temasek has a stake in DBS, the latter's management was not willing to overpay for a bank purchase.

But industry insiders, however, point to the appointment of Peter Seah as chairman of DBS since last May. Seah was a member of Temasek's advisory panel since 2005. Hence his presence in DBS is said to enable a better working relationship between Temasek and DBS. Temasek owns 27% in DBS.

AFG aside, banking insiders also do not rule out a possible DBS-RHB Capital Bhd deal.

It has been reported that there was an earlier proposal for DBS, RHB Cap and AFG to be involved in a two-phased merger. The proposal entailed RHB Cap first taking over AFG and, subsequent to that, DBS would end up buying up RHB. The deals will all be done mostly via share swaps, resulting in shareholders like the Employees Provident Fund ending up with stakes in regional giant DBS. However, that proposal had fallen through for a few undisclosed reasons. Speculation is that one of those reasons was that certain parties were uncomfortable with the entry of DBS into the Malaysian market, considering that two Singapore banks, namely OCBC and UOB, already dominate the foreign banking landscape in Malaysia. If that's true, that's yet another challenge facing DBS' entry into AFG.

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