Some five years ago, it was said that Tan Sri Quek Leng Chan offered the major shareholders of EON Capital Bhd about RM7 per share, which at that time was about two times book value. The deal was not taken up. Now turn the clock forward five years. The much-awaited price to Hong Leong Bank Bhd (HLBB’s) offer for EON Capital shares was unveiled at RM7.10 per share. At this price today, will the shareholders of EON Capital Bhd bite? Highly unlikely, if the offer of RM7 per share five years ago is true.

But, has anything changed that would justify shareholders of EON Cap accepting the offer now? The answer is yes.
For one, banks are required to boost their core capital under new international banking regulations that will come into effect in 2012. Shareholders of EON Cap would likely not relish the idea of forking out more money when this becomes reality.

Secondly, should the board and shareholders of EON Cap accept HLBB’s offer, it will result in a merged entity that will leapfrog to fourth position in terms of banking assets — a scale-up a number of mid-sized banks have hopes of achieving.
Considering the intricacies, the negotiations between the two financial entities are likely to take longer than the seven-day deadline set by HLBB. Also, there are a few possible scenarios that may pan out following this latest offer. One that has got tongues wagging is the possibility of a competitive bid for EON Cap.

So far, many banking analysts and industry observers think this is unlikely, given HLBB’s deadline. “We do not expect a competing bid for EON Cap to emerge in the short term. We believe EON Cap’s shareholders will be better off taking the current all-cash offer from HLBB and consider alternative investments elsewhere,” AmResearch wrote in a note last Friday.

What is interesting, though, is the few who see high chances of a counter bid happening within the week. Names that have cropped up are mainly banks, such as RHB Capital Bhd, AMMB Holdings Bhd and Alliance Financial Group Bhd. Of the three names being thrown about, there is strong newsflow that RHB Capital is exploring a bid for EON Cap, but whether or not this comes to fruition remains to be seen.

The Employees Provident Fund is a common shareholder in both financial institutions. EON Cap had also made a bid for RHB in 2007, losing out to the EPF in the end. EON Cap also has a history with AMMB. In 2003, merger talks between the groups fell through — some say because the parties could not agree on who should be in the driving seat of the merged entity.

EON Cap’s move to hire foreign investment bank Goldman Sachs to source for potential bidders has also led some to believe that a foreign suitor may emerge. But that seems quite unlikely, considering the foreign ownership cap on banks and EON Cap already having a strategic foreign shareholder in Primus Pacific Partners.

Whether or not an alternative bid arises depends on approval from Bank Negara Malaysia (BNM). EON Cap has applied to BNM for approval to talk to third parties but, until press time, it had yet to receive a response. EON Cap also applied  to go into talks to acquire another bank.

At the end of the day, though, the key to all deals is pricing. So, another possible scenario is that this deal may flop due to the offer price.

It is no secret that HLBB’s founder Quek is not known for overpaying for acquisitions, and industry observers believe he will not pay more than 1.5 times book value for EON Cap. This translates to RM7.65 per share.

Meanwhile, it is learnt that the substantial shareholders of EON Cap — namely Rin Kei Mei and Tan Sri Tiong Hiew Khing, who jointly hold 32.57%, and Khazanah Nasional Bhd with 10% — are looking for a higher price.

HLBB’s offer price of RM7.10 per share values EON Cap at 1.4 times book value of RM5.03 per share as at Sept 30, 2009. This is notably lower than the Southern Bank Bhd and Bumiputra-Commerce Holdings Bhd deal that was done at 2.4 times the former’s price-to-book value.

Some argue that HLBB’s offer is a fair one, while others believe there should be a scarcity premium placed on EON Cap, considering there are not many local banks left in Malaysia to be taken over.

Also, there is Primus, the foreign shareholder of EON Cap that paid RM9.55 per share for entry into the local bank. Selling at RM7.10 would certainly translate into a hefty loss for Primus. As such, many have come to the conclusion that Primus is not sold on HLBB’s offer and that is why they have yet to come out publicly to give their stance on the deal.

Nevertheless, on the flipside, the silence could also mean that they are not totally against a merger. A possible scenario that may play out is that Primus, the board, or the other substantial shareholders may come out to negotiate for a different package. For instance, instead of an all-cash offer, some shareholders such as Primus may want shares to participate in the enlarged entity.

And lastly, what would happen should the offer period expire and the board of EON Cap decide not to take up the RM7.10 per share deal? That does not necessarily spell “the end”, as HLBB could still go directly to the shareholders of EON Cap or perhaps return with a revised offer.

Given the deadline, next week will certainly be an interesting one — all eyes will be on EON Cap to see what move it will make. But, it seems likely that it will take more than seven days for something to come out of this deal.

This article appeared in the Corporate page of The Edge Malaysia, Issue 790, Jan 25-31, 2010.