Monday, May 22, 2006

Mega M&A Deals In Malaysia
A Precursor Of Things To Come?

KLSE had lacklustre year in 2005 when almost every Asian equity market performed better than the Malaysian bourse. However, last week saw two mega M&A deals rocking the investment scene in Kuala Lumpur.

MMC Corp Bhd announced last Wednesday its proposal to buy all the assets of independent power producer Malakoff Bhd for RM9.3billion (US$2.58 billion) cash. That will greatly expand MMC's girth, especially in 2008 when it will have full-year impact from the large 2,100MW Tanjung Bin power plant that will soon be commissioned in phases. That is expected to enable MMC's earnings to step up from current levels of RM300 million a year to about RM600 million, if it retains 100% of the power assets compared with its current shareholding of 22% in Malakoff.

Just one day earlier, OYL Industries Bhd said Daikin of Japan offered RM5.73 or a total of RM7.6 billion (US$2.1 billion) cash for all its shares. That was the largest takeover of a Malaysian company by a foreign group. None of the earlier takeovers come close, with the largest being Telenor of Norway's takeover of DiGi.Com Bhd. Telenor progressively bought up to 61% of DiGi for a total of about RM2.2 billion in 2001.

Could this evolve into a trend for the rest of the year? The big US/European private equity buyout firms have been setting up offices in Asia aggressively. Though they have largely concentrated on China and Japan, and to a lesser extent India and Indonesia - it may not be too far fetched to see them seeking out likely candidates in smaller nations in Asia-Pacific. Could the bigger companies be trying to make a move to acquire these "value-assets" before engaging in a price war with the big private equity buyout firms? I believe so judging from the new hires by these private equity firms. This has the effect of bringing up the valuation of "under valued" listed vehicles. The large funds backing of these private equity firms will ensure that willing buyers and willing sellers are easier to placate.

In America these buyout firms are likely to do these deals flying solo or with fellow buyout firms. The experience has been slightly different in Asia with buyout firms playing a secondary role by funding a corporate buyer. Its a safer approach as the Asian financial landscape needs local hands to navigate the political and legislative minefields.

Below are three listed vehicles in Malaysia which have a high chance of being acquired within the next 12 months:

1) Lion Forest Industries. LFI through its 97.78% owned subsidiary, Sabah Forest Industries Sdn Bhd is Malaysia's largest producer of printing and writing papers. SFI's main products are paper, pulp, sawn timber, plywood and commercial logs. The subsidiary also produces other products like building materials, lubricants, spark plugs, industrial equipment and automotive components. The respective annual production capacities of SFI for its various products are 150,000 MT for paper, 120,000 MT for pulp, 100,000 m3 for sawn timber, 120,000m3 for plywood and 500,000m3 for commercial logs. In addition, approximately 30% of its wood-based products are exported to countries in the Middle East and the Far East. LFI has a NTA of RM8.21 a share, and even if it is not offered up to its NTA value, market expectations are that its assets could easily fetch around RM6.50-RM7.00 a share. That may be below NTA but it's still a rich price relative to its current share price of below RM4.00.

Chances are very high that a deal will be transacted because of the surging commodity price trends, and the fact that any sale will see the proceeds going back to shareholders (even minorities) because there is a loan covenant which ensures that the distribution to Lion Industries (81% owner of LFI) should SFI be sold. This situation is more attractive for all concerned unlike when Lion Diversified, which disposed its brewery assets in China for RM1 billion in 2003 but only distributed RM140 million to shareholders.

2) JobStreet Corp. The company has a strong niche in Southeast asia for online job search market. JobStreet has already scaled past the critical mass needed to be profitable, and the first mover advantage has not been fully appreciated by the market. The company has a market cap of just approximately RM380 million (US$10.5 million) as it trades at just a forward PER of 16x. Even is finding it difficult to penetrate the Asia-Pacific online job search market. Global net players such as Yahoo or Google will find JobStreet to be a cheap buy into a viable online platform to build their Asia-Pacific net strategy. Other potential buyers will include the big successful newspaper companies in the region. Buying JobStreet by Star Publications or Singapore Press Holdings will create a better revenue strategy for these print media companies. An actual M&A deal could see a deal which could double JobStreet's existing market capitalisation.

3) RHB Capital. RHB Capital has a 70% stake in RHB Bank, a commercial bank with 185 bank branches in Malaysia. Khazanah holds the other 30%. The bank has to be consolidated under a bigger banking group because its current ownership structure is convoluted. RHB Bhd controls RHB Capital, and other stakeholders directly and indirectly include the state pension fund EPF, Utama Banking Group and KWAP. A sale of RHB Capital is inevitable as RHB Bhd struggles with debts of over RM3.2 billion.

The buyer, there won't be many (I mean there won't be many that will be "allowed to buy") and the prime buyer will be Bumiputra-Commerce Bhd. Fresh from digesting its acquisition of Southern Bank, many investors would think that BCB would not be in the mood for another acquisition. The potential acquisition should go through because its ramifications are more than just business and numbers. As it stands, Maybank is the country's largest bank by assets with RM2.2 billion and BCB with assets of RM1.5 billion after the acquisition of Southern Bank. To swallow RHB Bank would propel BCB assets to RM2.65 billion (approximately). That would make BCB to be the largest bank in the country. Najib Razak is expected to be the next Prime Minister. Wouldn't it be "lovely" if BCB (helmed by younger brother Nazir Razak) were to be the country's biggest bank then?

RHB Capital trades at RM2.46 currently, a deal could see the transacted price to be between RM2.90-RM3.10 range.


Moola said...


Wassup? Here's some views of mine on this issue.

I find the game very lopsided against the minority shareholders when it comes to privatisations issues, in which the minority shareholder is never ever fully compensated against the risks for investing in the listed company.

Past privatisations issues, like Propel, MetroJaya and Bermada comes to mind and most recently Johor Port and Malakoff.

Hence to bet on such issues, the rewards simply doesn't justify. And more so if one puts the time issue into perspective.

M&A deals. OYL. Not too rewarding unless one had the much sought after inside track many moons ago.

The profitable one? Them hostile M&A like seen in Southern Bank.


Salvatore_Dali said...


Totally agree... that is why these stocks will not make my "top picks in the hypothetical fund". Timing is everything. Malaysia do have a large number stocks trading under its NTA or cashflow valuations or prospects - may be time for rich pickings though. To buy and hold and hold, and you could end up holding your balls. Malakoff and OYL were OK to hold in the first place, especially Malakoff with its good dividend, but you are right that these are things to consider and if the rumour mill gets louder, maybe the timing is better.

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