MTR Corp has stepped up a gear in its proposed merger with Kowloon-Canton Railway Corp and is expected to announce shortly that Merrill Lynch will advise minority shareholders on the HK$12 billion deal. The investment bank advised the government when the MTR went public in 2000 and it is believed it will now be appointed as independent financial adviser to 270,000 minority shareholders who must vote on the merger at an extraordinary meeting expected in October. Among the issues that minority shareholders will be keenly awaiting when the Merrill report lands on their desks, analysts said, will be its view on controversial terms of the merger such as replacing the MTR's autonomy in fixing its fares with a fare-adjustment mechanism and an extended period of freezing fares by 12 months to June 2009. Critics of the merger plan have said the terms would erode profits and destroy value, though the MTR has defended the proposals as balanced and in the interests of all stakeholders. Following the green light given by the government to the merger with the passage of the merger bill last month, the MTR's six-member independent board committee must now evaluate whether the merger terms are fair and reasonable and whether the merger is in the interests of the corporation and its shareholders. It must also give its opinion on how minority shareholders should be advised to vote, after taking into consideration the Merrill Lynch report now believed to be in the offing. Committee member David Eldon, former chairman of the Hongkong and Shanghai Banking Corp, said in an e-mail that the committee would keep all shareholders informed upon coming up with a conclusion. The upcoming extraordinary meeting will set the stage for a tussle between the proponent of the merger - the government - and minority shareholder activist David Webb. Mr Webb, also a non-executive director of Hong Kong Exchanges and Clearing, has called on fellow MTR shareholders to vote against the merger, arguing that the company is giving away its 'trophy asset' - fare autonomy - for free. Mr Webb says the decision to extend the fare freeze period effectively erases HK$4.5 billion in the post-merger valuation of MTR. The government, which controls 76 per cent of the MTR and the entire KCRC, is not qualified to vote under listing rules. Some analysts estimate that 12 per cent to 14 per cent out of the 24 per cent public free float is being held by institutional investors. However, Mr Webb suspects that a number of institutional investors are government units 'in disguise' as the government is exempted from any securities disclosure rules. These units have investment portfolios managed by fund managers. For example, the Housing Authority poured HK$12.5 billion into global equities including Hong Kong stocks earlier this year and two government-managed funds - Subsidised Schools Provident Fund and Grant Schools Provident Fund - had HK$14.6 billion and HK$513 million respectively invested in Hong Kong equities. This is not to mention the significant exposure of Hong Kong Jockey Club and other charity trusts to Hong Kong equities. UBS analyst Eric Wong said MTR minority shareholders had a good reason to vote for the deal unless they wanted to see the stock price slump. 'If they say yes, the decision will remove uncertainty over the merger and will give a shot in the arm to the stock price,' he said. Citi and HSBC are advising the government while Goldman Sachs and UBS are advising the MTR. Morgan Stanley is an adviser to the KCRC.