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HONG Leong Bank Bhd (5819) has submitted its improved RM5.06 billion all-cash bid for EON Capital Bhd (EONCap) to Bank Negara Malaysia and shareholders of both banks are set to vote on it in May.

At the same time, Hong Leong said it plans to raise up to RM1.6 billion from a renounceable rights issue and RM1.8 billion from the sale of capital qualifying securities.

The submission brings the deal, which would create the country’s fourth biggest banking group, a step closer to completion. However, it did not include a share option that was requested by EONCap.

Hong Kong investment firm Primus Pacific Partners Ltd, EONCap’s single biggest shareholder with 20.2 per cent, has been resisting the takeover.

It paid RM9.55 per share for its stake while Hong Leong’s fresh offer is worth RM7.30 a share. On April 18, Primus said it had no plans to sell its shares although it appears that the deal will happen if enough shareholders say yes.

This is because Hong Leong is proposing to buy EONCap’s entire asset and liabilities, a method that requires the nod of just over 50 per cent of EONCap shareholders.

“We target to have our extraordinary general meeting to seek our shareholders’ approval for the transaction by end of May,” Raymond Choong, president of Hong Leong Financial Group Bhd (HLFG), said in a statement.

“The proposed rights issue, on the other hand, is undertaken to strengthen our capital base after the completion of the acquisition of EONCap assets and liabilities” Choong added.

Hong Leong plans to ask HLFG to subscribe to its portion of the rights issue, which will raise RM1.02 billion for the lender.

Hong Leong’s offer comes with several conditions. Chief among them is that it has to be satisfied after going through the books of EONCap.

If the due diligence reveals any adverse effects on EONCap’s financial position or any contingent liability that amounts to at least RM100 million, Hong Leong will offset its bid price against that sum or it could also choose to drop the deal.

Related Posts:

• EONCap Shareholders say Yes for sale of EON Bank
• EONCap sequel: EGM on 19 August
• EONCap Saga continues : Proceed with EGM
• EONCap to issue notice to shareholders
• EONCap board approved submission offer to shareholders

AS THE debate on takeover rule changes heats up, a corporate lawyer argues that the role of independent advisers can be boosted instead to protect small investors and help them get a higher offer price. SC proposal to review the take over code after the announced take over of EON Capital Berhad (holding company of EON Bank) by Hong Leong Bank via acquisition of assets and liabilities instead of acquisition via the listed entity.

Sreesanthan Eliathamby, a partner of law firm Kadir Andri & Partners, who has in the past advised on several major transactions in the country, said there are other more effective ways to achieve a better price for minority investors in a merger and acquisition (M&A) deal, rather than tightening the rules outright.

“For example, you can expand the role of independent financial advisers to ensure that the advice given is more granular and assist the minority in making an informed decision,” Sreesanthan told Business Times in an interview in Kuala Lumpur yesterday.

“If the price difference between what the independent adviser has recommended and the offer is more than 10 per cent, the regulator can require that the deal cannot go through,” he suggested.

He said the Securities Commission (SC) should look into these alternatives because a tougher rule will immediately drive away potential buyers on impression that a deal is harder to be done, and yet there is no guarantee that minorities will get a higher offer once the bar is raised.

“We must be clear on the rationale for raising the shareholder’s approval threshold. Is it for uniformity, or the perception of shareholder democracy or pricing? If it is pricing, then my view is that it is better achieved in other ways,” he added.

Last month, the SC said it plans to close the gap among different rules that govern takeover activities. The regulator has put up a set of consultation paper on this where the public has until today to respond.

Among the proposed changes are that a company planning to sell off its key assets must get the approval of at least three-quarters of its shareholders. The plan can also be blocked if at least a tenth of shareholders votes against it.

K&N Kenanga Holdings Bhd group director Tengku Zafrul Aziz said the veto rights given to the minority shareholders who own just more than 10 per cent of a company is unfair to other owners.

“This only protects the minority, but all shareholders have their rights too. This is too onerous for any company because why would you need a majority stake if you can practically control the company with slightly more than 10 per cent?” Zafrul told Business Times when contacted.

On the existing regulation gap on various methods to take over a company, Sreesanthan argues that each route has in itself the check and balance to ensure sufficient investor protection.

“People think that when the proponent wants to take a company private, they will sit down to see which route requires the lowest approval threshold to get through. This is not true in real practice.”

He said some opted for the assets and liabilities sale method because the potential buyer can do due diligence on the target company’s assets before presenting the offer. In comparison, buyers cannot do a due diligence on takeover offers under the Takeover Code, and hence, the offer price will be lower to provide for any surprises.

The asset and liabilities sale route also gives flexibility to the target company to stay listed and find another investment once the existing assets are sold, and not necessarily delist the company as in the case of a takeover.

Related Posts:

• EONCap Shareholders say Yes for sale of EON Bank
• EONCap sequel: EGM on 19 August
• EONCap Saga continues : Proceed with EGM
• EONCap to issue notice to shareholders
• EONCap board approved submission offer to shareholders

Its front page in all major newspaper in Malaysia today, 5 February 2008. The purchase of Primus Pacific Partners Ltd (a Hong Kong based investment fund) of 20.2% shareholdings of EON Capital Bhd from DRB-HICOM. Primus major shareholders are the Qatar Investment Authority and the Tsai family that control Taiwan based Fubon Financial company.

Pro Trade Shares decided to break its own promise of not making any comments about listed shares in Bursa. I have decided to comment on the matter of Primus Pacific Partners buying a majoring stake in EON Capital Berhad which own EON Bank. Will this be the first of many to come? I don’t know. Maybe I will, maybe I won’t. Why don’t you guys out there post your comments on this.

The inside information that I received was that since mid 2007, Primus appointed auditors/consultants have been doing its due diligent in EON Bank since they applied to Bank Negara to negotiate on the purchase of a major stake from DRB-HICOM. All budget proposal for 2008 submitted to EON Bank board of directors were scrutinised. All the expenditure proposal has to be approved by the appointed consultants before the bank board can discuss them. This is to ensure Primus’s interest is protected prior to the official signing of the purchase agreement.

A few senior management staff have either ‘retired’ or ‘re-assigned’ in a new organisation structure announced at the end of 2007. Two senior position has been created; Head of Group Finance and Head of Group Operations and IT. The positions are still vacant.

There is a very strong possibilities that these two senior positions will be given to Primus appointed people. The Head of Group Finance is a very important position in the bank. It allow the person to authorise all expenditures or spending or investment by the bank. Therefore the bank board or senior management committee cannot authorise any ‘big’ expenditure spending without the knowledge of Primus (if the person is appointed by Primus).

The last traded price for EON Capital Bhd this morning (5 February 2008) is RM6.40, up 32sen. Still far from the price of RM9.55 per share as paid by Primus to DRB-HICOM.

According to reliable sources, Bank Negara will not allow Primus to increase its stake in EON Capital Bhd as Primus is not a foreign financial institutions such as a bank, unlike the ANZ bank from New Zealand that took a much bigger share in Arab Malaysian Bank last year. Since Primus will not be making anymore offer to existing shareholders of EON Capital Bhd, my guess is that the share price will not move upward to the RM9.55 region. Its share price will continue to be in the region of RM6.00 to RM7.00 unless there are any major announcement on its profitability or its business direction.

There, this is my comments on the purchase of major block from DRB-HICOM by Primus Pacific Partners Ltd. and the very high possibility of Primus placing their people in the senior management position in EON Bank.

To my Chinese readers, I wish you all a very Happy and Properous Chinese New Year, the year of the RAT.

Related Posts:

• EON Capital said Yes to Hong Leong takeover
• Primus petition failed
• EONCap Shareholders say Yes for sale of EON Bank
• EONCap sequel: EGM on 19 August
• Hong Leong extends EONCap offer to November 2010