CIMB Group - MOU for RBS businesses BUY

CIMB Group Holdings (CIMB) announced that it has entered into a memorandum of understanding (MOU) for the proposed acquisition of certain parts of the cash equities, equity capital markets and corporate finance businesses of the Royal Bank of Scotland (RBS) in Asia Pacific. The MoU provides for the parties to negotiate exclusively with each other and to finalise the scope and terms of the sale and purchase agreement. 

The proposed acquisition of selected segments of RBS’s business has been widely reported. Thus, the announcement posed no major surprises. The press had reported in mid-February that the acquisition price will likely be US$50mil.  It was reported then that CIMB had has been confirmed to be a buyer of RBS’s Australia equity business, which currently employs 175 of 600 staff overall.   

RBS has been reported to be looking at exiting its cash equities, corporate broking, equity capital markets and merger and acquisition (M&A) businesses in Asia Pacific. It was reported that RBS operates in 11 countries in Asia. RBS was reported to be ranked 24th in the league table that ranks banks according to revenue derived from advising on mergers and acquisitions, stock sales and bond underwriting, and syndicated loans throughout the Asia Pacific region last year, according to data from Dealogic.  In 2010, it was in 20th place.

We believe CIMB will also likely be looking at other parts of RBS’s businesses for sale, besides the Australian operations, given that RBS is reported to be selling these at a discount.   

We also view the potential acquisition as more than an acquisition of bankers, despite RBS’s reportedly lower ranking in the leagues table. While it can be argued that CIMB would be better off building its own platform in equities business in Asia Pacific, including Australia, we believe that, given a relatively digestible price tag, the potential RBS acquisition will provide CIMB with a platform that would be immediately up and running, rather than embarking on a slower organic expansion process.  

We also expects the deal to enhance CIMB’s investment banking franchise. We are thus inclined to be positive on the deal, subject to the final price tag. We maintain our BUY rating with CIMB with a fair value of RM8.00/share. 

Source: AmeSecurities