Can the GLCs reap benefits from mergers?

  • Corporate News
  • Saturday, 17 Oct 2020

The private company Perspective Lane Sdn Bhd, which controls among others Tradewind Plantations and Central Sugar Refinery, has proposed to inject its assets into FGV in an exercise that would see the former being the single largest shareholder in the plantation company.

BEFORE the chatter on UEM Sunrise Bhd’s proposed takeover of Eco World Development Group Bhd can settle down, another private company, one controlled by Tan Sri Syed Mokhtar Al Bukhary who has his fingers in almost every segment of the economy, has proposed a corporate exercise with FGV Holdings Bhd.

It’s eyebrow-raising stuff: in a space of three weeks, two large government-linked companies (GLCs) are considering mergers with their peers in the private sector.

The private company Perspective Lane Sdn Bhd, which controls among others Tradewind Plantations and Central Sugar Refinery, has proposed to inject its assets into FGV in an exercise that would see the former being the single largest shareholder in the plantation company.

Unlike the UEM Sunrise-Eco World deal that came under criticism from some groups and politicians who alleged that it would compromise bumiputra shareholding in the corporate sector and that it was a bailout of Ecoworld, the scrutiny on the FGV deal revolves around whether it is beneficial for the settlers in Felda schemes.

Corporate exercises involving GLCS are always difficult because most of them do not have a problem in getting a line of financing due to their shareholders. Even for those in trouble such as Boustead Heavy Industries Corp Bhd (BHIC), creditors generally do not fret as the jobs are from the government and they will eventually get paid.

Also, companies under the ambit of government-linked investment companies (GLICs) always hold an advantage when it comes to competing for government jobs. Be it a construction job or a mandate for procurement, GLCs always have the upper hand over a non-GLC. That is why non-GLCs tend to team up with GLCs to bid for government jobs.

So what value can privately-owned companies, that are driven by individuals, deliver to GLCs like UEM Sunrise and FGV? More importantly, will minorities lose out in the deal?

Khazanah Nasional Bhd managing director Datuk Shahril Ridza has defended the property deal, stating that it was not a bail out of Ecoworld and that GLICs would continue to hold more than 50% in UEM Sunrise after the merger. He justifies the proposal describing Ecoworld as a good fit for UEM Sunrise due to its track record of township developments.

UEM Sunrise’s land bank is largely located in Iskandar Malaysia in Johor where the property glut is worse compared to other states. The state government’s arbitrary approval for land reclamation works to build sea fronting properties contributed to the glut.

Other than Iskandar Malaysia, UEM Sunrise has pockets of small developments in Mont Kiara and Bangi in Selangor where the response has been good compared to the developments in Johor. The advantage for UEM Sunrise is that it holds vast tracts of land in Iskandar Malaysia at low cost that allows it to undertake land-banking or joint-venture activities.

However, Khazanah wants to reduce its stake in UEM Sunrise. It is part of the mandate given to Shahril when he took over the leadership of the sovereign fund in 2018. Khazanah has received other proposals for UEM Sunrise but obviously felt a deal with Ecoworld is better.

As for Ecoworld, it has at least 10 township developments in the fringes of Klang Valley, Penang and Johor. It also has another seven joint-venture developments including the Bukit Bintang City Centre project, which is right at the centre of Kuala Lumpur.

Compared to UEM Sunrise, Ecoworld has more township developments where affordable houses priced at less than RM500,000 can be launched easily.

However, between the two, UEM Sunrise has a stronger balance sheet. It has cash of RM864mil with borrowings of RM2.4bil. As for Ecoworld, it has cash of RM261mil against borrowings of RM3.4bil as of end July this year.

If one were to look from the financial perspective, UEM Sunrise is in a much better position. But it lacks the entrepreneurship to drive the company and monetise its land bank quickly.

As for Ecoworld, Tan Sri Liew Kee Sin leads the company and comes with a proven track record in entrepreneurship. Liew is credited with building SP Setia Bhd before it was taken over by Permodalan Nasional Bhd (PNB). He left SP Setia and started Ecoworld from scratch to become a big developer within a few years.

The job of the independent directors of UEM Sunrise is to ensure that Liew and his team are locked up in the merged entity – that they bring the entrepreneurship drive into the new property grouping so the minorities of both companies see better returns in the longer term when property prices recover.

As for FGV, the focus is more on what the government wants for the company.

Its major shareholder, Federal Land Development Authority (Felda), has not been able to privatise FGV so far, a move which it had always felt would be more beneficial to its objective of having a better cash flow to ensure its sustainability.

FGV was listed at RM4.55 in 2012 and among its investors are Felda settlers and Koperasi Pelaburan Felda (KPF). The listing earned FGV RM4.9bil and its shareholder Felda RM6bil. The money that was meant to build up the company was instead used to buy assets that were not productive.

Since 2017, the politicians on the board of FGV have been replaced with a new team led by Datuk Wira Azhar Abdul Hamid. An accountant by training, Azhar has put in place a plan to increase the profitability of FGV and hopes to give better returns to its shareholders, especially Felda.

Felda wants to cancel the land lease agreement (LLA) with FGV as it feels that it can get better returns if it manages the plantations itself instead of leaving it to FGV. Under the LLA, Felda gets RM250mil per annum and 15% of FGV’s operating profit.

But FGV’s results have been less than stellar in the last few years and Felda has not been getting the returns it had been counting on.

Shareholders of FGV who took up the shares at listing also have not been able to recoup their investments even after taking into account the dividends over the years. Many had been expecting Felda to offer them a good price and take back FGV.

FGV and Tradewinds are in similar business. Both have plantations and sugar refining operations. But being in the same business does not mean that synergies can be maximised and operating cost being reduced in the politically-charged FGV.

There are ample examples in the Malaysian corporate history where mergers to create scale and size did not result in better bottom line and returns for shareholders. The task can be more difficult for FGV where not all decisions are commercially driven.

Moreover, the proposal from Perspective Lane comes ahead of a report on Felda that is prepared by a special task force headed by Tan Sri Abdul Wahid Omar. The objective of the report is to chart a plan to sustain Felda and ensure it is able to carry out its obligations towards settlers without depending too much on the government.

If the Perspective Lane deal materialises, Felda can no longer claim to be the de-facto owner of FGV. So what is the use of the report really? And even if FGV is looking at drawing synergies from other plantation groups, why not cast the net further?

There could be many suitors.

M. Shanmugam is the former specialist editor of The Star. Views expressed here are his own.

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FGV , Syed Mokhtar Al Bukhary , UEM Sunrise , mergers ,


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