Felda Global explains why it cannot do Indonesian Eagle deal alone

PETALING JAYA: The proposed acquisition of a 37% stake in Indonesia’s PT Eagle High Plantations Tbk had to be reviewed due to lower crude palm oil (CPO) prices and weaker ringgit higher, says Felda Global Ventures Holdings Bhd (FGV).

“These factors have made it necessary to review the existing transaction framework in order to extract the best value for all parties involved,” the group explained in a reply to StarBiz.

FGV announced last week that it was reviewing the terms of the deal, which initially entailed an outlay of US$680mil (RM4.25bil) to be paid mostly in cash and some shares.

FGV previously had said that the deal would give it access to around 425,000ha of land in Indonesia, nearly two thirds of which are in the Kalimantan province.

In its latest earnings disclosure for the third quarter, the group fell into the red partly due to higher foreign exchange (forex) losses arising from the weakening ringgit against the dollar.

For the quarter under review, FGV reported a net loss of RM33.92mil, an increase from the RM9.33mil in net losses a year earlier.

In a Nov 27 note, Maybank Investment Bank Research said FGV’s bottom line had been hit by forex losses of RM74mil in the third quarter.

The continuing oversupply of edible oil commodities, coupled with flattish global consumption demand, has dampened CPO prices.

According to RAM Ratings in a Nov 27 note, CPO prices have averaged RM2,174 a tonne this year as at October, or the lowest average price in at least five years.

FGV chief executive officer Datuk Mohd Emir Mavani Abdullah had recently told StarBiz that all options were being considered to revive the deal.

The 37% stake in Eagle High is held by the Rajawali Group, a conglomerate controlled by Indonesian tycoon Tan Sri Peter Sondakh.

“As previously highlighted, FGV is currently in discussions with Rajawali and a conclusive mode of investment will only be announced in 2016. We urge all parties not to speculate to avoid any premature conclusions,” FGV said.

In a Dec 1 filing with Bursa Malaysia, FGV said that it was mulling over a new method of investment in Eagle High.

Among the alternatives mentioned were joint ventures, offtake agreements and mutually agreed collaborations.

These methods essentially mean that the group will not have to shoulder the financial burden of acquiring Eagle High by itself.

The review makes sense, given the prevailing conditions in the palm oil sector.

Despite CPO recovering somewhat to around RM2,400 per tonne based on the three-month benchmark futures, prices are still at a historic low on a dollar basis due to the ringgit’s weakening this year.

The combination of low demand and lower CPO prices have eroded the margins of Malaysian plantation players.

Additionally, companies such as FGV and IOI Corp Bhd were further encumbered by unrealised forex losses due to their exposure to overseas operations.

On the other hand, it is unclear as to how FGV intends to consolidate the assets and earnings of Eagle High if a joint-venture partner were to be brought into the deal.

The consolidation of assets is important, as it would allow FGV to improve the overall age profile of its currently ageing palm trees.

Eagle High’s prized landbank assets consist of 137,000 planted hectares of mainly young and immature trees with an average age profile of eight years.

Back in June, when the deal was first announced, FGV said that the addition of Eagle High’s landbank would significantly improve its overall yields, as well as reduce capital expenditure costs required for replanting.