"Given the risk of uncertainty in completion of the takeover and the potential legal battle, we believe that investors are better off to switch into other banking stocks such as RHB Capital," Affin Investment Bank said in a report yesterday.
The stock, which ran up in the last few months, fuelled by merger and acquisition (M&A) talk, peaked at RM7.20 on June 7.
Yesterday, it fell by 1.3 per cent to RM6.93, its lowest in about a month. This was after news that its largest shareholder, Primus Pacific Partners, which launched the legal action, wants all the directors - except its own representative Ng Wing Fai - to pay the company about RM1.2 billion in damages if the current takeover deal is passed through in an extraordinary general meeting (EGM).
The directors had planned to recommend that shareholders accept the Hong Leong offer.
Primus, among other things, is also asking the court to declare the current takeover offer unlawful and wants some directors removed on the basis that they favoured the interest of certain shareholders over others.
Primus is resisting the takeover as Hong Leong's offer of RM7.30 a share is much lower than its entry cost of RM9.55 a share.
The High Court has set hearing for July 6. EONCap's directors are seeking legal advice on what to do. They delayed announcing an EGM date on Tuesday after the lawsuit came a day earlier.
Analysts believe that the directors are unlikely to call for an EGM for the time being as they'd probably want to focus on the court case first.
Shareholders would be "uncomfortable" voting on the Hong Leong deal while there is still a legal suit pending, they said.
"Their first hurdle is the lawsuit," said a banking analyst from RHB Research.
Still, there is pressure on EONCap as Hong Leong has said it may withdraw its offer if the smaller bank doesn't secure shareholder and regulator approvals for the deal by August 15.
While analysts still like the fundamentals of the company, pointing out that they have seen a lot of positive transformation, there are still worries that the bank could suffer as a result of the breakdown in the relationship of the major shareholders.
These worries persist despite the bank's chief executive officer Michael Lor moving to assure investors on Tuesday that the lender's aggressive growth plans were on track and that the business was unaffected by the latest developments.
"I believe the pending legal suit could have an adverse impact on the company and directors. It may affect morale and staff confidence, and indirectly, the business," said an analyst from a local bank-backed brokerage, who declined to be named.
Most analysts who track the stock currently have a "hold" or "neutral" call on EONCap, while at least two have a "buy". Affin Investment kept its "reduce" call and its target price of RM7.30.
- by Business Times
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