Did Malaysia’s biggest lender, Malayan Banking Berhad (KLSE: MAYBANK, stock-code 1155), overpay when it bid billions of dollars in its quest to acquire 100 percent of Bank Internasional Indonesia (BII)? Maybank agreed to fork out a whopping $1.5 billion for 55.7 percent stake of the Indonesia’s sixth largest bank with another $1.2 billion for the remaining 44 percent stake from BII shareholders. It definitely raised many eyebrows with investors gave an early punishment when it sent Maybank’s stock price lower by more than 10 percent, it’s biggest drop since September 21, 2001 when market reopened this morning.

Maybank will acquire the 55.7 percent controlling stake from Sorak Financial Holdings, a consortium 75% owned by Temasek and 25% by South Korea’s Kookmin Bank in a deal that valued BII at 511 Indonesian Rupiah per BII share – a premium of 23 percent. Maybank defeated other bidders including Hong Kong Shanghai Banking Corporation (HKSE:0005), China Construction Bank (SEHK:0939, SSX:601939) and Bank of China (SSX:601988, SEHK:3988).

Temasek has been forced to sell the stake under a Bank Indonesia’s rule of single presence policy banning an investor from having controlling stake in more than one bank in the country. Temasek also has a majority stake of 69.57% in the country’s fifth-largest lender, Bank Danamon. Malaysia’s Khazanah Nasional Berhad also affected by such ruling but it planned to merge both Lippo Bank and Bank Niaga.

Too Pricey – Analysts downgrade Maybank

Analysts said a US$2.7 billion offer for PT Bank Internasional Indonesia (JAK: BNII) is overpriced and will undermine its ability to pay dividends. Furthermore the offer prices BII at 4.6 times book value, above Maybank’s 2.3, while the top five Indonesian banks now trade at around 3.8 to 3.9 times book only. Maybank naturally has created history as this is highest ever paid (book value) for a banking acquisition in Indonesia.

BII had posted weak financial results in the past two years while the country’s other major lenders had reported strong performances – its net profit tumbled 36 percent and 13 percent for financial year 2007 and 2006 respectively. Hence analysts were generally stunned with such a high offer from Maybank. But Maybank said the price was justified as the deal would help it tap neighbouring Indonesia’s fast-growing banking market which is aiming for loan growth of over 20 percent this year.

To add salt to the wound Citigroup Inc. and Morgan Stanley cut their ratings on the stock. Citigroup slashed Maybank’s target price to RM8.38 a share from RM10.63 and downgrade it to “Sell”. Meanwhile Credit rating agency Fitch put Maybank’s creditworthiness (current A- credit rating) on watch after the deal. While Maybank said it would fund the deal internally Fitch thought otherwise – the bank was likely to have to raise capital to reinforce its balance sheet. Credit Suisse analyst said the deal would empty the war-chest that Maybank has accumulated for acquisitions.

Maybank Dividend Yield at Risk

The cash-rich Maybank has about $11 billion (RM36 billion) cash on hand. Maybank last paid a special cash payment to shareholders in 2005. The company’s stock offers a gross dividend yield of 3.5 per cent, more than double that offered by Malaysia’s second-biggest bank, Bumiputra-Commerce Holdings Bhd, according to data compiled by Bloomberg. However with this latest acquisition, the hope of any special dividend vanishes – another reason why the stock was dumped.

Who’s the Winner?

The winner is definitely Singapore’s Temasek which paid only $217 million or 82 Rupiah a share for the BII (51 percent initially but increased to 56 percent later) in 2003 from BPPN, Indonesia’s banking rescue agency – making a fivefold profit from the sale. While Temasek is laughing all the way to the bank, Maybank still has to face and seek shareholders approval, not to mention regulatory approval from Bank Indonesia although Malaysia’s central bank has approved the acquisition.

So, could this be another classic example of a little too late and a little too pricey for Maybank to expand regionally? Hopefully it was not a decision (to purchase BII) based on emotion to emerge as the winner. Regardless of the arguments from Maybank’s top management to justify the acquisition, it’s up to the shareholders to reject or approve the acquisition.

Could there be any relationship between this pricey acquisition and the rumors that Bumiputra-Commerce Holdings Berhad’s (KLSE : COMMERZ, stock-code 1023) Bumiputra-Commerce Bank might be merged with Maybank?

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March 27th, 2008 by financetwitter

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