Monday, September 29, 2008

Maybank in a Catch-22 situation

The other interesting news over the weekend is Maybank's rejection of a revised offer from Fullerton Financial Holdings ('Fullerton'), to lower the selling price of its 55.5%-stake in Bank Internasional Indonesia ('BII') by 11% from USD1.5 billion (or, RM5.16 billion) to USD1.335 billion (RM4.59 billion). This is the latest blow to the deal after Bank Negara via its letter dated 25 September 2008 informed Maybank that their earlier approval is now subject to the following conditions:
(a) Maybank to obtain an extension to the 26 September 2008 deadline, being the last date to fulfill the conditions precedent as stipulated in the Share Sale Agreement dated 26 March 2008; and
(b) Maybank to obtain a new agreement on a purchase price that will not result in substantial impairment under the international financial reporting standards that would impact the fundamental financial soundness of Maybank.

There has been quite a lot of criticism of Bank Negara's intervention in what is essentially a commercial transaction carried out by Maybank. Some have criticized Maybank's management for its aggressive overseas expansion, where it has paid excessively for its acquisition of BII as well as its 15%-stake in Pakistan’s MCB Bank. If Fullerton refused to lower the selling price further and the BII deal is aborted, Maybank may lose more than the deposit of RM480 million. Fullerton is likely to sue for damages under the terms of the Share Sale Agreement ('SSA'). As such, we could see more downside to Maybank's share price in the near-term.

From the chart below, we can see that Maybank (closed at RM6.90 as at Sept 26th, but suspended today) is now resting on its immediate horizontal support of RM6.85. A break of this support will send the stock to the psychological support of RM6.00 and thereafter to horizontal support levels of RM5.65 & RM5.00.

Chart: Maybank's monthly chart as at September 26, 2008 (source: Quickcharts)

Fundamentally, Maybank is now trading at a P/Book of 1.75 times (based on its NTA per share of RM3.95 as at 30/6/2008). This is very attractive valuation for a well-managed commercial bank, especially the top bank in Malaysia. However, most analysts do not share this sentiment, ever since Maybank began its regional expansion program.

How much damages could Fullerton recover from Maybank if the BII deal is aborted. That will depend on the terms of the SSA & how much the new buyer will pay for Fullerton's BII stake. Assuming that it can find a buyer for its 55.5%-stake at 3.0 times its book value (due to the current poor sentiment for bank stocks), Fullerton may sue Maybank for the loss equivalent to [4.6 - 3.0] times BII's book value (note: Maybank had agreed to acquire BII from Fullerton at 4.6 times its book value). The amount of damages could be about USD522 million (or, RM1.796 billion). Alternatively, if Fullerton can sell the BII stake at only 2.5 times its book value, it may sue Maybank for the loss equivalent to [4.6 - 2.5] times BII's book value. The amount of damages it will seek to recover will be USD685 million (or, RM2.356 billion).

On the other hand, if Maybank were to proceed with the deal, it will have to incur goodwill writeoff (or, actual losses on divestment as stipulated by Indonesian central bank). Goodwill writeoff will become an issue when you acquired a company for more than its underlying assets' value, unless you can convince your auditors that there is no impairment to the asset value. To do so, you need to show your auditors that the acquired company's profitability has increased. The probability of a drop in BII's bottom-line in the next few years is significant, given the slowdown in the global economy. Bank Negara is very concerned on this issue & has put its reputation at stake in order to help Maybank. How much goodwill writeoff are we looking at? Again, if the writeoff is to lower the investment value to a certain multiple of its book value, we can estimate the amount to be about USD643 million (or, RM2.212 billion)- if fair book value is deemed to be 3 times book value- or USD937 million (or, RM3.223 billion)- if fair book value is deemed to be 2.5 times book value. Based on Maybank's NTA of RM19.28 billion as at 30/6/2008, the goodwill writeoff could reduce the NTA by 12-17%.

If Fullerton & Maybank can agree that a fair deal is one where BII is valued at 3.0 times its book value, then Fullerton may further lower its selling price by USD121 million (on top of the earlier USD165 million reduction). Would that happen? We will have to wait & see.

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