Monday, October 17, 2011

Merger between OSK (RM1.79; TP>RM2.20) and RHB Cap

BNM had just given approval to OSK and RHB Cap to start talks on possible merger of the two firms. Dateline is 3 months from 13 Oct 2011. OSK share price had a good run since its announcement of its application to commence merger talks with RHB Cap on 29th Sept, surging from RM1.39 in Sept 29 to RM1.79 today. Will its shares have further leg for upside from current price? It depends on the likelihood of the takeover and the pricing.

The merger is in line with RHB Cap’s intention to expand its investment banking operations and RHB intends to follow the footsteps of its peers such as Maybank and CIMB. RHB Cap is currently the third largest broker while OSK is the fourth largest. Thus a merged entity of the two firms would make RHB the largest broker in Malaysia with a market share of 13.6% vs CIMB’s 10.5%. In addition, the merger would allow RHB Cap to expand overseas through OSK’s exposure to markets in Singapore, Indonesia, Hong Kong, China and Cambodia fast. Or else, it will take years for RHB Cap to expand organically. The major shareholder of OSK, Ong Leong Huat, was rumored as having the intention to sell OSK since last year but only at a substantial premium, perhaps around 2x book value (This rumor was heard last year. Times had changed since then, thus 2x book value would be less likely than last year). In addition, BNM seems supportive of a merger between the two looking at its rather quick response in approving the merger talks. 

Pricing could be around 1.4x to 1.9x book value of OSK, or takeover price of RM2.20 to RM3.00. Maybank recently acquired Kim Eng at 1.9x book value while CIMB acquired GK Goh at 1.2x book value. Besides, Kim Eng tried to acquire Inter-Pacific Securities at 1.4x book value. Since OSK is much larger and more established than Inter-Pacific Securities but trails behind Kim Eng, OSK’s takeover price could be anything between 1.4x to 1.9x. However, this depends also on whether OSK’s Ong would be willing to let go at any price below 1.9x book value. 

Let’s see how this deal pans out. In view of this friendly takeover being in line with RHB Cap’s regional expansion plans and Ong’s intention to sell OSK with BNM being supportive of it, it’s likely that the deal will go through. The deal will likely involve some share swap, maybe half cash half shares. Potential upside for OSK stock price would be at least 22% assuming that takeover price would be at least 1.4x book value. Holding period: 3 months

Market Data - OSK

Shares issued: 963.6 mil
Stock price: RM1.79  
Market Cap: RM1,725 mil  
P/BV: 1.14x  
Trailing 12M PER: 13.7x

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