KHAZANAH Nasional Bhd’s move to reduce its stake in IHH Healthcare Bhd is more than the sovereign wealth fund losing its status as the single-largest shareholder in the giant healthcare company.
It marks the end of the Khazanah–led government-linked company (GLC) transformation programme, which started in 2005. It also is the start of Khazanah version 3.0.
Some 13 years ago, the push for transformation among GLCs came from the government. It ended up with the emergence of Khazanah version 2.0.
An integral part of the transformation journey is Khazanah identifying and nurturing companies that are able to compete and operate outside Malaysian shores. On that score, IHH sprouted up and grew to become the second-largest listed healthcare service provider in Asia.
The companies are different from the old businesses that were already in the national sovereign fund before the transformation. The older companies are the likes of Telekom Malaysia Bhd (TM) and Tenaga Nasional Bhd (TNB) that are in the traditional brick-and-mortar business.
An exception was TIME Dotcom Bhd, where Khazanah ended up with a stake in after its listing in 2000.
In 2002/2003 when Khazanah took over the Renong/UEM group as part of the government’s efforts to rebuild corporate Malaysia, its stable of companies in traditional businesses increased to include Plus Expressways Bhd, Cement Industries Malaysia Bhd and UEM Edgenta Bhd – a facilities maintenance operator.
The older businesses are generally focused on the domestic market, operate in a regulated environment and need to fulfil the government’s social agenda of helping bumiputra entrepreneurs as well as individuals with potential.
“This is how Khazanah became a major source of employment for young and bright talent,” says an executive familiar with the workings of Khazanah.
Among the three regional companies, IHH is a new business that Khazanah built after acquiring Pantai Hospitals and Singapore’s Parkway Holdings Ltd. As for CIMB Group and Axiata, the companies grew from a base that was mainly in Malaysia.
The executive describes IHH as the hallmark of how former Khazanah managing director Tan Sri Azman Mokhtar wanted to shape the new-look Khazanah.
“Azman’s aim was to create regional companies which were not bounded by local restrictions and operated on an international platform, just like some companies under Temasek Holdings Pte Ltd,” says the executive.
After the May 9 general election, the new government wanted Khazanah to go back to its old ways as part of the mantra that “the government should not be in business”.
It wants Khazanah to reduce the number of companies in which it holds strategic stakes to a select few that have a bigger national interest.
Among the companies that fit the bill are TM, TNB, Malaysia Airlines, Malaysia Airports Holdings Bhd, Silterra Malaysia Sdn Bhd and Plus Expressways.
“There are one or two more companies with strategic national interest. Khazanah will continue to hold substantial stakes in these companies. It will reduce its stake in the other companies,” says the executive.
Among the companies that Khazanah is likely to reduce its stakes in are UEM Edgenta, CIMB Group, IHH, Axiata, UEM Sunrise Bhd, TDC and a few others.
“There is no hurry. Over time it will be done as Khazanah version 3.0 takes shape,” says the executive.
At the moment, Khazanah has a “fairly substantial stake” in these companies and has influence on board appointments, key management appointments, strategic direction and long-term growth plans.
“Under the new direction, Khazanah is likely to reduce its stake to about 20% or less. The companies would be more like a portfolio investment in the books of Khazanah.
“As a portfolio manager, Khazanah buys and sells stakes. It will have board representation but will not drive the companies or play a key role in their growth strategy,” adds the executive.
Reduced dependency on a leadership team?
A wider implication is the impact on the current set-up of Khazanah as its direction shifts.
A manager of a portfolio of assets would not need a large team of highly-qualified people ranging from investment bankers to accountants and mathematicians to manage the companies.
When Azman resigned as managing director at end-July this year after having served for 14 years and two months, he had identified two successors and a senior leadership team with about 20 highly-qualified people to carry out the mandate of Khazanah.
The senior leadership has another layer of about 100 young people who are groomed for future positions.
Khazanah paid its people well as part of the plan to instil professionalism and ensure that those entrusted to look after these assets were not tempted to cut “side deals” for themselves.
“The people are well-remunerated so much so that it made it difficult for many to move on to other organisations. For instance, an executive director in Khazanah would probably be taking home more than the CEO or deputy CEO of a government fund,” says a fund manager.
On remuneration, even Datuk Shahril Ridza Ridzuan, who replaced Azman, is speculated to be taking home less than some of his subordinates in Khazanah.
“This is because of the structure of remuneration in the Employees Provident Fund and its mandate as a portfolio manager where they are paid less than Khazanah,” says a fund manager.
Khazanah’s remuneration package is a thorny issue under the new government. The rationale is that the performance of companies under Khazanah is helped by the fact that they are indirectly owned by the government.
“Hence, the people working in Khazanah should not be getting high remuneration,” says a director familiar with Khazanah’s working environment.
However, the director also points out that there were many who were with Khazanah because they wanted to be part of Khazanah 2.0 and rebuild corporate Malaysia in 2005.
“All those who have left Khazanah over the years have gone on to earn much more outside, which shows that they can earn more if they left the organisation,” says the director.
Going forward, the remuneration packages of the top executives in Khazanah are expected to be trimmed should they opt to stay on when their contracts end.
Moreover, the appointment of Shahril from the EPF, whose remuneration package is said to be not as generous as Khazanah, in some ways will have an impact on the existing remuneration structure of Khazanah.
“Prime Minister Tun Dr Mahathir Mohamad personally handpicked Shahril to head Khazanah. He is taking home less than some of his subordinates in Khazanah’s leadership team. It will be odd for the managing director to earn less than his subordinates,” says the director.
The remuneration package is expected to reflect the sovereign wealth fund’s shift from becoming an owner of many strategic assets to a manager of a portfolio of investments.
No hurry to divest
The sale of a 16% stake in IHH is the first off the blocks. The transaction, which was brokered by Deutsche Bank Malaysia, is the first of a significant asset to be sold by Khazanah in recent years.
“Mitsui & Co Ltd paid a premium to take control of IHH when markets were down. It shows the value in IHH. Previously, Khazanah was in the driver’s seat and Mitsui held a strategic stake. Now, the roles are reversed,” says an investment banker.
The transaction that is valued at RM8.42bil will see Khazanah sitting on hefty gains as its cost of investment in IHH is much lower.
“The sale of IHH would be enough to keep Khazanah going this year and a large part of next year. It would not be in a hurry to reduce its stakes in other listed companies,” says the banker.
Among the companies that are likely to attract international buyers are Axiata and CIMB Group because both are regional and not restricted by Malaysian regulations.
Axiata’s operations in South Asia and South-East Asia make it a good fit for any international company that wants an immediate presence in these regions. Axiata also has the telecommunications tower business under edotco Group Sdn Bhd that is slated for a listing.
As for CIMB Group, its presence in Indonesia is a plus point for any banking group wanting exposure in the most populous country in South-East Asia.
“Indonesia is a difficult market for banks because of the currency risk. But it is also a market that many would want to be in because of the huge population and potential. This is where CIMB Group has its value,” says the banker.
As for Khazanah’s domestic-centric businesses, it has caught the attention of some local businessmen and groups.
Investment bankers are already working on some transactions, but so far, nobody is in a hurry, says the banker.
It will take some time before the next major divestment takes place and the transactions may not be as straightforward as the IHH deal.
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