By G. Sharmila
Utility provider Tenaga Nasional Bhd (TNB)’s shares fell as much as 3% to RM12.28 at 9.16am from yesterday’s close of RM12.66, after it announced yesterday its proposals to buy Edra Energy Global’s power assets.
After falling to RM12.28 the share price began to slowly climb, then dipped again to RM12.34 as of 10.46am this morning.
Yesterday, TNB announced to Bursa Malaysia it had submitted an indicative non-binding proposal proposal to buy five of Edra’s power plants in Malaysia and eight of its power plants abroad. Edra Energy Global is the power arm of beleaguered self-styled strategic investment fund 1Malaysia Development Bhd (1MDB).
TNB said that it was in the initial stages of its assessment of Edra’s power assets, giving no assurance that the transaction would go through. The announcement also said that ‘any transaction would need to make strong commercial sense and be value accretive to TNB’s shareholders’.
TA Research in a note this morning commented that if the acquisitions materialise, it will enable TNB to further consolidate its power generation assets in Peninsular Malaysia.
“We estimate TNB’s gross generation capacity market share will be boosted to approximately 69% from 42% presently. Another advantage is that TNB will be able to consolidate the operation of the Jimah power plant complex, which will have total capacity of 3,400 MW when Project 3B is completed.
“The downside is that most of the assets are old and some are already at the tail end of its concession period. In addition, 1MDB paid a total of RM12 billion to acquire the assets (including RM3.3 billion goodwill, out of which RM1.2 billion had already been written down) and inherited approximately RM6 billion in debts (mostly project financing for Jimah),” the research house said.
It said it thinks that the pricing of a deal will be closely watched by the market. “Buying the power assets at the original investment cost (RM12 billion) will likely be viewed as a bailout. That said, we take comfort in the arms-length manner in which TNB acquire the 70% stake in Project 3B from 1MDB. Moreover, the minority shareholders could also exercise their rights to reject an over-priced deal in an EGM to approve an acquisition,” the research house added.
CIMB Research was similarly skeptical about the news. In a note today, it said that it believes the proposed acquisition, if it proceeds, will likely be neutral to slightly negative to TNB’s valuation in the near term.
“The acquisition could be negative because 1MDB acquired its power assets for RM18 billion (includes RM6 billion inherited debt ) but has since written down about RM1.18 billion of acquisition-related goodwill.
“The transaction could be perceived negatively if Tenaga’s bidding price implies an EV (enterprise value) of more than RM16.82 billion. We think it will have a neutral impact if Tenaga pays a fair price for the assets. However, the transaction is unlikely to be significantly positive because the chances of Tenaga buying the assets at a significant discount to their fair values are slim as other parties are also bidding for the assets,” the research house said.
CIMB did how concede that an acquisition should be positive for TNB in the long run as the exit of 1MDB from the Malaysian power sector will reduce the competition for future power plant projects.
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