Aabar likely to leverage on 1MDB Energy

Aabar's parent IPIC has provided guarantee to 1MDB's debt papers to help fund purchases of Tanjong and Genting power plants.

Aabar's parent IPIC has provided guarantee to 1MDB's debt papers to help fund purchases of Tanjong and Genting power plants.

MIDDLE Eastern group Aabar Investments PJS is in an interesting position today: it is right smack in the middle of two major corporate developments in Malaysia that are unfolding.

It holds a 21.43% stake in RHB Capital Bhd which potentially puts it in a position to determine the success or failure of the proposed mega-banking merger between that banking group and CIMB Group Holdings Bhd .

Aabar also holds an option to subscribe to equity in 1MDB Energy Bhd, the power arm of 1Malaysia Development Bhd (1MDB) that is slated for an initial public offering (IPO).

Industry observers have raised the prospect of whether this situation puts Aabar in a good position of leverage.

“There could be a quid pro quo deal on the table. If they don’t get a great deal on one, the idea is for the profits from the other deal to cover any shortfall from the other,” notes one industry observer.

An investment banker adds: “If Aabar is able to sell its options (to the IPO) back to 1MDB for a good price, then it would have made a huge gain that would more than offset any loss it has on RHB”.

Aabar’s option for shares in 1MDB Energy had come about after its parent, International Petroleum Investment Corp (IPIC), had provided a guarantee to 1MDB for its US dollar debt papers to the tune of US$3.5bil. This was to help 1MDB fund the purchases of both the Tanjong and Genting power plants in 2012.

In return for the corporate guarantee from IPIC, 1MDB had given a 10-year option to Aabar to acquire up to 49% equity interests in the Tanjong and Genting power plants when the energy division goes for listing. This option has a monetary value but its unclear how much this is worth.

It has since been reported that 1MDB intends to extinguish the guarantee so that there will be less dilution in its impending listing. This will be done by 1MDB buying back the option (to subscribe for equity in the power unit) from Aabar.

It has also been reported that the indicative price that 1MDB was looking at for this acquisition was around US$700mil. Incidentally, this is reportedly the same figure that 1MDB intends to soon ‘bring back’ from the monies it had invested with foreign fund managers.

“1MDB Energy is poised for a listing in the early part of next year. The submission had been delayed because a substantial amount of its assets are overseas. The financial years were different and due diligence was time consuming,” says a source.

Sources say Aabar is looking at an indicative value of around US$1bil for its options on 1MDB Energy.

“If it gets that amount or anywhere near it, the sovereign fund would be more than compensated for its investments in RHB Cap,” says a source.

How this is resolved could have a bearing on how Aabar is treated in the planned RHB-CIMB merger, one source theorises.

The banking deal seems to have reached epic proportions, with reports that the Abu Dhabi government has reached out to the Malaysian government to try to ensure that Aabar is treated fairly in the transaction.

At the crux of the matter lies the value the deal will attribute to RHB Cap shares. Aabar had forked out RM10.80 per RHB Cap share, valuing the bank then at 2.25 times book, when it acquired the block from sister company Abu Dhabi Commercial Bank back (ADCB) in 2011.

ADCB, in turn, had also paid 2.2 times book value when it first bought into RHB Cap in 2008 at RM7.20 per share.

However RHB Cap has never commanded that kind of valuations from the market.

“This is something that Aabar realises. Apart from valuations, the other factor that Aabar is considering is the requirements of Basle III. Shareholders of banks may be required to fork out more money to strengthen capital,” says a source. “Aabar does not want to be in that situation.”

The upside offered to Aabar is that the merged entity is likely to eventually command a valuation of about 1.8 times its book value and it would be enough to cover its cost of entry into RHB Cap.

Banking , M&A , Aabar Investments PJS , RHB Capital , 1MDB