Further to my article on  some of the reasons for companies to privatize, recently in The Star , it was reported that infrastructure group MMC Corp Bhd is taking private Malakoff Bhd, in a deal that values Malaysia’s biggest independent power producer at Rm9.3 billion, making it Malaysia’s biggest-ever corporate takeover.

Let’s look at the following scenario of this Privatization proposal/deal:
 

Malakoff Bhd:
(a) Shareholding of Malakoff Bhd as at 13 th May, 2006

• MMC Group has an existing  22% stake,the other major shareholders in Malakoff Bhd are Britain ‘s International Power (IP) 18% shareholding and Employee Provident Fund (11% shareholding) and balance of 49% under others,

(PS: The major shareholder in MMC Bhd is Tan Sri Syed Mokhtar Al-Bukhary who is a very well-known businessman in Malaysia who has earlier used the same vehicle, MMC Bhd  to offer a general cash offer to take private Johor Port Bhd which owns Port of Tanjung Pelepas, a fast-growing transshipment port in Johor. Johor Port Bhd is seen as a major player in the Ninth Malaysian Plan projects in South Johor),

(b) Share price and future prospect

• Malakoff Bhd’s share price was Rm9.85 per share and its market capitalization was Rm8.85billion( last traded 11 th May 2006 prior to suspension,
• Last year, Malakoff had increased its stake in Segari Energy Ventures (SEV) by 18.75% to 93.75% last year. SEV owns the power plant at Manjung, Perak,
• Malakoff Bhd’s full earnings should be very much higher as its existing accounts has not yet reflect the full year contribution from all  three phases of the 2,100MV Tanjung Bin power plant.
   

MMC Bhd:

(b) Objectives in taking over Malakoff Bhd and privatizing it:

• According to MMC’s acting Group CEO, Encik Feizal Ali, this is in line with the proposed exercise to consolidate and transform the group to focus on three core businesses namely transport and logistics, engineering and construction and energy and utilities,
• In the process, the transaction will enhance MMC’s shareholders value by ensuring sustainable earnings, cash flow and ultimately enhancing dividend payout for the group. Incidentally,it is noted that MMC has many good assets, but they are mostly associate companies hence it only gets the effect of dividends payout from these companies, not the full cashflow.” Unlike the associate companies, this takeover of Malakoff will results in receiving direct cash flow. Incidentally, it is noted that for last year itself, Malakoff contributed over 41 per cent to MMC’s bottom-line

The Proposed Exercise:

• MMC plans to set up a special purpose vehicle (SPV), Nucleus Avenue(M) Sdn.Bhd (NASB) to buy all the non-cash assets and liabilities of Malakoff  for Rm9.3 billion,

• It will then only keep more than half of NASB and invite investors to join in the company,

• Next, MMC recommends Malakoff to distribute its cash to shareholders via a capital reduction under which major shareholders like IP & EPF will get Rm10.35 cash per Malakoff share.

MMC which already owns 22% of Malakoff would need votes from more than half of the remaining 78% shareholders of which IP have already given their nod and analysts believe EPF will most likely agrees as well.
 

Some Interesting Salient Points:

• The actual total estimated amount of the deal is about Rm16 billion which besides the purchase price of Rm 9.3 billion also includes the assuming of the liabilities of Malakoff  which is about Rm7 billion debts which makes it a whopping  Rm16 billion deal!

• Coupled with its own bank debts, MMC group taking in additional debts from this acquisition and prior to this as mentioned above was on an earlier acquisition. What’s a ferocious appetite for immediate inorganic growth!  All these are happenings in the iSyed Mokhtar Al-Bukhary’s expanding stable of companies.

• Incidentally, MMC would be taking over a company larger than itself. Malakoff’s market capitalisation of RM8.85bil is substantially bigger than MMC’s market value of RM5.8bil.

• Though Malakoff is a very well-run company, to further protect itself, a SPV is created to “fend” it off from MMC. No recourse is on MMC if anything happens to this SPV company. This is unlikely to happen as technically the cash flow from Malakoff Bhd and its units are able to pay off any bank borrowing interests. However, we can recall that the above sound a little bit similar to 1980’s leverage buy-out in the States. Of course most of the deals failed because the takeover companies were not able to generate its own cash flow to pay off its debts.

• When this deal is completed by the first quarter of year 2007, MMC group would have increased their earnings by as much as 52% for financial year 2007. Investors who would like to buy power stocks can then buy MMC as Malakoff will be de-listed. This will make MMC as the biggest power playing stock!

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