PETALING JAYA: As merger talks between RHB Capital Bhd and OSK Investment Bank Bhd proceed, the most sensitive aspect would be pricing as compared with other similar deals and in the midst of a bear market.

“Earnings are coming down,'' said an analyst. “RHB Cap should be paying less than the 1.9 times to 2.2 times book value as speculated.''

Quoting a source, a weekly publication said the deal could be tagged at that range and financed via an issuance of new RHB Cap shares to OSK or its shareholders.

“It should be done at a more reasonable price,'' said another analyst, arguing that Maybank had paid 1.91 times for Kim Eng Securities which has a wider regional coverage and more established operations.

Kam: ‘This exercise is transformational in nature and will hopefully strengthen our domestic banking business.’

“The listed brokerages such as ECM Libra, Kenanga, HwangDBS and even OSK, prior to the announcement of the proposed deal, were trading at below one time book value.

“CIMB paid 1.2 times for GK Goh but that was based on the strength of CIMB as an investment bank and its ability to create value for the deal,'' he added.

Before Kim Eng was acquired by Maybank, Kim Eng had proposed to acquire Inter-Pacific Securities at 1.4 times.

When contacted, RHB Cap group managing director Kellee Kam said: “We are excited about the merger discussions with OSK, subject to Bank Negara approval. This exercise is transformational in nature and will hopefully strengthen our domestic banking business and give us a regional platform to grow from.'' For the first six months of FY2011, OSK reported a net profit of RM52mil.

A source told StarBiz: “Besides book value, one would have to look at the price/earnings ratio. Earnings potential is an important factor in this deal.''

Other advantages include additional talent and expertise, size and market share as well complementary business with RHB Cap in the institutional space and OSK's strength in the retail small and medium size companies franchise.

It was rumoured that OSK would be willing to sell out at two times book value, analysts said, adding that was prior to the Maybank/Kim Eng deal.

“It depends on whether OSK's major shareholder, Ong Leong Huat, is willing to stay on,'' said the analyst. “If Ong is still driving the business, RHB Cap may be willing to pay more.''

Assuming that RHB Cap acquires OSK at 1.34 times, which is a 30% discount to that paid by Maybank for Kim Eng due to OSK's less extensive regional footprint, the acquisition price would work out to around RM2bil or 51% premium to OSK's market capitalisation, an analyst who declined to be named said in his research note.

RHB Cap's net profit for FY11 would be enhanced by only 1.2%, assuming it is a cash deal and after annualising OSK's first half results for FY11, he said, adding that despite that, the potential deal was still positive for RHB Cap which would gain immediate investment banking presence in Hong Kong, Shanghai, Phnom Penh and Jakarta.

According to HwangDBS, RHB Cap is ranked third with a 7% market share; combined, RHB Cap and OSK would top the list of brokers with a market share of 13.6% by trading value (CIMB is currently highest at 10.5%).

RHB Cap has an outstanding proposed rights issue of RM1.3bil to fund the acquisition of Bank Mestika, for which plans are on hold pending new rules on bank ownership in Indonesia.

While not discounting that RHB Cap may raise funds for the OSK acquisition, HwangDBS said it would not be surprised if RHB Cap “walked out on Bank Mestika.''

To Nomura Research, capital remains a concern. Assuming a price tag of RM2.8bil that includes OSK's property business, RHB Cap's group core equity Tier One would decline to 5.7% from 7.5% currently.