Why Felda is under fire for Rajawali deal

EVEN before Felda Global Ventures Holdings Bhd (FGV) has started the due diligence on its proposed acquisition of a 37% stake in PT Eagle High Plantations Tbk and its sugar plantations from the Rajawali Group, the worries are mounting.

It does not help that FGV is a political hot potato and has politicians on its board.

Concerns on FGV taking on more than it can chew comes at a time when even its own Malaysian operations are not coming along smoothly in terms of efficiency and productivity, to the point that it is making losses, as based on its latest quarterly results.

The deal does not favour FGV, something that most analysts agree on. The management of the plantation bigwig, however, begs to differ.

The mood in Indonesia is that the Rajawali Group is going against national interest by selling equity in plantation companies to foreigners. Between the two, the case is more difficult for FGV.

Scrutinising the deal, there are several reasons why the proposed transaction has not gone down well with investors, as evidenced by the performance of FGV’s shares.

Only in September last year did the Rajawali Group, via Rajawali International, become a controling shareholde of Eagle High Plantations, which was then known as BW Plantations.

The Rajawali Group ended with a stake of 68.6% through a rights issue that was done at 400 rupiah per share.

Before the rights issue, the Rajawali Group had a stake of less than 25% in BW Plantations.

The rights issue was a huge dilution to existing shareholders, as it was offered at six rights share for one. The existing shareholders of BW Plantations gave up their entitlement to Rajawali International and the exercise raised close to rupiah 11 trillion (about US$825mil).

Rajawali ended up controlling Eagle High Plantations after the rights issue. Based on 400 rupiah per share, Rajawali Group is estimated to have had to fork out about eight trillion rupiah (US$570mil) or more for the rights.

But now FGV is proposing to pay US$680mil for just a 37% stake in Eagle High Plantations – which is more than the entire cost incurred by the Rajawali Group to control Eagle High Plantations.

What this means is that the remaining 31.6% stake that the Rajawali Group holds in FGV is almost free. And the Indonesian group will continue to manage the plantations.

There may be valid reasons for Rajawali Group, which is no small entity and counts on names such as Singapore’s GIC as among its business partners, to seek a high entry cost from FGV.

The onus is on FGV to explain and convince investors of its rationale to agree to such terms, which brings us to the second reason why the deal is being frowned upon.

Eagle High Plantations will still be managed by the Rajawali Group despite FGV being the largest shareholder. There could be reasons for this.

For instance, FGV may not be able to manage the company, or the Rajawali Group together with its friendly parties may collectively hold more equity in Eagle High Plantations. But the bottom line is that FGV is paying about 760 rupiah per share when the market price is about 400 rupiah.

Shareholders must know why FGV is paying a premium for the 37% stake in a company that it doesn’t even manage.

The third reason boils down to the capabilities and expertise of FGV to manage the asset. It already has undertaken three acquisitions in the last two years. The management already has its hands full sweating the assets and deriving the maximum synergies from the acquisitions.

It started with Asian Plantations Ltd, followed by Pontian United Plantations Bhd and Golden Land Bhd’s plantations recently. Has the management extracted maximum synergies from these acquisitions?

No, not yet so far. Deriving synergies from mergers takes time.

Not forgetting, FGV also manages thousands of ha for settlers and Felda, the holding company. Merely sweating the existing assets in its stable should be enough to keep FGV busy.

Gestation period

Eagle High Plantations has 425,000ha, of which less than 180,000ha are planted and the trees are eight years of age on average. Planting the rest of the hectarage requires large capital and the gestation period is at least five years before the investment starts to pay off.

This is on the assumption that a tree once planted takes at least six years before it bears fruits.

Even though the Rajawali Group will be managing the operations, FGV will still have to take care of its investments there in terms of controlling cost and ensuring there is cash flow to service its cost of investments.

Would there be immediate cash flow for FGV from the purchase, since it is taking on debt to fund the deal?

Land issues complicated

Fourthly, land issues in Indonesia are complicated. Leases are generally for 30 years, with an option to extend for another 30 years. This is the reason why the plantations in Indonesia generally command a lower valuation.

Can FGV extract a premium should it decide one day that it wants to realise the value of its investments in Eagle High Plantations?

Certainly, FGV should be thinking of such a possibility because its interest in Eagle High Plantations is only as an investor.

Lastly, why fork out a deposit of almost US$175mil for an agreement that has yet to be firmed up?

What was signed between FGV and the Rajawali Group was only a heads of agreement. It’s not even a conditional sale and purchase agreement.

Although FGV has stated that the amount was part of the agreement, it does not make sense, especially when there is no break fee if FGV walks away from the deal. This means that if FGV walks away from the deal, there would be no penalty.

FGV is no small company. It has cash and assets. It has all the proof to show that it has funds should it decide to purchase the stake.

If FGV was a small and unknown entity without balance sheet strength, then it provides reason for the Rajawali Group to insist on a high deposit. But that is not the case.

The onus is on FGV’s management to explain why it agreed to such terms.

The deal will go through shareholders’ approval in a few months down the road. FGV need not wait until then to explain the logic behind the proposed deal.

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