Merging the plantations


  • Business
  • Saturday, 15 Mar 2003

BY ERROL OH

 

IT is telling that Datuk Seri Abdullah Ahmad Badawi cited Permodalan Nasional Bhd's (PNB) plantation companies as an example when he spoke about the move to merge government-linked companies.  

There has long been talk of combining these listed plantation players, but the announcement on Tuesday is so far the firmest indication that we may indeed see such a thing happening. 

There is also speculation that the mergers will involve companies in other sectors such as banking, insurance, telecommunications, construction, automotive and ports.  

After all, government and statutory bodies own substantial stakes in a large number of companies on the Kuala Lumpur Stock Exchange (KLSE), particularly those in strategic industries. 

Still, the strongest case for mergers is that of the plantation companies in the PNB stable.  

For one thing, the plantation industry deals with homogenous commodities, and the companies' operational structures are similar in most ways.  

As such, extracting economies of scale from the merged businesses will be easier. 

It helps considerably that PNB is a major shareholder of a number of big plantation players, either directly or through Amanah Saham Bumiputra. 

It owns large chunks of equity in Golden Hope Plantations Bhd (over 50 per cent), Kumpulan Guthrie Bhd (73 per cent) and Sime Darby Bhd (43 per cent) that has a sizeable plantations division. 

Kumpulan Guthrie in turn controls two other listed plantation players, Guthrie Ropel Bhd and Highlands & Lowlands Bhd. Mentakab Rubber Co (M) Bhd is a Golden Hope subsidiary.  

In addition, PNB controls over 70 per cent of Island & Peninsular Bhd that is merging with subsidiary Austral Enterprises Bhd, a plantation company. 

These companies together own a few hundred thousand hectares of estates in Malaysia.  

According to one research outfit, their union will create the country's largest single private owner of plantation land and the largest producer of palm oil in the world. 

That sounds pretty impressive and is certainly in keeping with the objective of the mergers – to increase the presence of large premier companies on the KLSE. 

An entity of this size will have deeper capacity to, for example, venture overseas and undertake research. In theory, it will be more focused and specialised, and thus have greater earning power. 

However, most plantation analysts do not believe that the PNB plantation companies will all become one.  

Such an exercise will be dauntingly complex and fraught with potential pitfalls. The valuation of the assets and devising ways to please everyone (particularly the minority shareholders) will be a huge headache. 

“I'm not convinced that having one giant plantation company is a good idea,” says an analyst with a foreign investment bank. “There is just so many ways for things to go wrong.” 

Furthermore, industry insiders say a few of the larger companies are already internationally competitive on their own. Merging them, they argue, makes little sense. 

“Investors go for earnings, growth and returns, and not necessarily size,” says the chief executive officer of a plantation company. “If they really want big companies, they'd look at the New York Stock Exchange, not here.” 

A more likely scenario is that there will be some streamlining of plantation groups that have more than one listed company. Island & Peninsular has already embarked on a merger with Austral Enterprises. 

Kumpulan Guthrie and its two listed subsidiaries, for example, are expected to restructure so as to improve share liquidity and enhance shareholder value. Golden Hope (which has another listed subsidiary, property developer Negara Properties (M) Bhd), is likely to do the same. 

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