WHEN Sime Darby Bhd
and Genting Bhd first announced their intention to jointly bid for Australia's Loy Yang Power in January, the market barely nudged.
But, when they both announced over the week that they were pulling out of the bid, there was an audible sigh of relief.
The truth is no one seemed quite convinced that there was indeed a good reason at all for these Malaysian companies to court Loy Yang Power.
Mayban Securities, for one, believes that the highly competitive power pooling system in Australia makes it a difficult environment to seek decent returns. And this is regardless of any debt restructuring that might occur within Loy Yang.
It says: “Although Loy Yang is operationally profitable, we are concerned about its high gearing as it has AS$3.4 billion of outstanding debts”.
Loy Yang, which is Australia's largest privately owned generator, supplies a third of Victoria state's electricity requirements. In addition, it has brown coal reserves that will last for more than 1,300 years.
Loy Yang had become increasingly mired in debts after the Victoria state government sold the power utility giant for A$4.8 billion in 1997. Its total debts stand at around A$3.5 billion, at present.
From the onset, the acquisition, for Genting, would have tied in neatly with its current power concern Genting Sanyen Sdn Bhd. Genting has increased its stake in the power subsidiary from 40 per cent to 60 per cent.
The Loy Yang Power acquisition would have been good for Genting, which sits on a cash pile of about RM1 billion, if the investment could generate higher returns than the fixed-deposit rates.
And clearly for Sime Darby, the acquisition would have served as a boon for the company, which for long has been aggressively and actively seeking to expand its power business. Having acquired a 60 per cent stake in 440 megawatt PD Power, it went on to acquire a 100 per cent stake in Thailand's Laem Chabang Power Co Ltd.
The Loy Yang acquisition would have been considered the icing on the cake for the cash-rich conglomerate's power business.
But no one's sorry that it's not happening.
“The acquisition would have involved a high capital outlay but there was no guarantee that the returns would have been commensurate with the investment owing to the power pooling system,” says an analyst.
On the other hand, he says the withdrawal of the bid will not have an impact on the earnings projections of either company as too little was revealed about the bid to allow the market to factor in the impact of the acquisition on valuations and earnings at that point.
Earlier, it was rumoured that the sale value of Loy Yang was A$4 billion.
According to OSK Securities, this would have translated into a demanding price to earnings ratio of more than 100 times if based on the generator's net earnings of A$39.3million as at June 30, 2002.
Both Sime Darby and Genting made announcements to the Kuala Lumpur Stock Exchange on Wednesday that they had withdrawn their non-binding indicative bid for the power plant and mine in Victoria, Australia.
While no reason for the recent decision was given, some parties are claiming that complications arising from Loy Yang's debt restructuring could have been the stumbling block.
Others are saying the consortium may have encountered a hitch in securing the Malaysian government's approval for the bid.
US-based CMS Energy Corp, NRG Energy Inc, and Horizon Energy Investment Group own the 2,000-megawatt Loy Yang Power.
It is widely-known that the three shareholders are in dire need of money to fulfil a A$500 million-debt repayment obligation in May this year.
Another major repayment of A$750 million is due in May 2006. As a result, they agreed to sell the asset as a whole early last year.
Apart from the Genting-Sime Darby partnership, a consortium comprising Australian Gas Light Co, Tokyo Electric Power Co and the Commonwealth Bank of Australia also made offers for the power generation company.
The latest moves by both companies, by no means indicate that they have ceased their search for more power assets.
In fact with this deal down, market observers are excitedly anticipating the large companies' next moves.
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