By Khairie Hisyam
As confusion emerged over its divestment of a majority stake in Bandar Malaysia development, ailing 1Malaysia Development Bhd (1MDB) has disclosed the proposed structure of the deal and insisted it is getting RM7.41 billion one way or another.
In a statement, 1MDB said it is essentially selling the 486-acre development land, which the RM7.41 billion price for a 60% share values at RM12.35 billion in total. While what portion of this consideration is received in cash depends on ongoing negotiations, 1MDB said the end consideration “does not change”.
The clarification comes as confusion erupted after one party in the buying consortium, China Railway Group, told the Hong Kong Stock Exchange (HKEx) that the consortium is paying RM5.28 billion for 60% in Bandar Malaysia Sdn Bhd. This amount is 28% lower than the RM7.41 billion announced by 1MDB on Dec 31, 2015.
For the purchase, China Railway via its Malaysian arm China Railway Engineering Corp (M) Sdn Bhd (CREC) is partnering Iskandar Waterfront Holdings (IWH), which in turn is a 60:40 partnership between Credence Resources Sdn Bhd and the Johor State government via state arm Kumpulan Prasarana Rakyat Johor Sdn Bhd (KPRJ).
Credence Resources Sdn Bhd is the vehicle of Johor-based businessman Lim Kang Hoo.
1MDB had previously stated that the RM7.41 billion is subject to possible adjustments as negotiations progress. Any fluctuation would largely depend on how both sides decide to account for existing liabilities attached to the development.
“The only difference is whether 1MDB receives the amount (RM7.41 billion) in full then pays for the costs; or whether the consortium pays for its share of the costs and remits the balance of RM5.3 billion to 1MDB,” said 1MDB.
‘Selling land’
The transaction centres around the sale of 16 plots of land that make up the Bandar Malaysia development project land area, said 1MDB, which will involve the transfer of associated liabilities into a proposed new vehicle.
Four plots are currently held by 1MDB subsidiary TRX City Sdn Bhd, while another subsidiary, Bandar Malaysia Sdn Bhd, holds the other 12. For the transaction with IWH-CREC, the current proposed deal structure is for a new vehicle to be formed which will purchase all 16 plots, said 1MDB.
The new vehicle will be 60% owned by IWH-CREC, while 1MDB holds the remaining 40%. After acquiring the entire acreage of the Bandar Malaysia development site, the new vehicle will undertake the development of the Bandar Malaysia project, said 1MDB.
Notably the wording of 1MDB’s statement dated Jan 6, 2016 acknowledged the possibility that 1MDB’s 40% remaining stake may be transferred to the company’s sole shareholder Minister of Finance (Inc) (MOF Inc), the investment vehicle of the Finance Ministry.
As at Dec 31, 2015, 1MDB president and group executive director Arul Kanda said that possibility had been considered before but not final decision had been made.
In either possibility – whether 1MDB retains the 40% or passes it to MOF Inc – majority ownership of the Bandar Malaysia project ultimately remains in Malaysian hands, said 1MDB, as the effective stake for China Railway is 24%.
Existing liabilities
Still being discussed by both parties are two existing liabilities linked to the Bandar Malaysia development land, said 1MDB, the outcome of which will impact what portion of the RM7.41 billion consideration actually goes to 1MDB.
The first relates to the relocation of the Sungai Besi air base located on the development land, which 1MDB must complete as part of the arrangement through which it purchased the land from the Malaysian government.
According to 1MDB, the main relocation contract and development agreement was valued at approximately RM2.7 billion and includes new land acquisition costs, construction costs and equipment costs. The remaining costs are estimated at RM1.9 billion currently, said 1MDB.
The second is a sukuk worth RM2.4 billion in terms of notional value at maturity, with accrued value of RM1.63 billion.
At present the intention of both 1MDB and the IWH-CREC consortium is to transfer these liabilities to the proposed new vehicle, said 1MDB, which would entail a 60:40 sharing of the costs involved.
This would require all parties to determine and agree on the final costs for the relocation and sukuk as well as all relevant consents from the Malaysian government, pre-appointed contractors for the relocation as well as sukuk investors, said 1MDB.
“Should 1MDB and the consortium agree on the costs and manage to procure the consents, then the consortium will pay its 60% share of the costs and the purchase consideration (of RM7.41 billion) will be adjusted accordingly,” said 1MDB.
“In other words, RM12.35 billion land value less RM1.9 billion relocation costs less RM1.63 billion sukuk costs = RM8.8 billion, of which the 60% consortium share is RM5.3 billion,” added 1MDB.
However, if the costs cannot be agreed upon or required consents could not be procured, 1MDB would receive the full payment of RM7.41 billion and use it to bear the costs involved, the company said further.
‘National security not impacted’
While concern was raised on possible impact to national security vis-a-vis the possible influence of China in decisions involving Malaysian military installations via this deal, 1MDB stated there will be no impact as the relocation will proceed as previously planned with existing contractors.
The concerns arose as China is a major shareholder in HKEx-listed China Railway Group, which in turn would hold an effective stake of 24% in Bandar Malaysia once the transaction is concluded. Pandan MP Rafizi Ramli raised questions on whether this would lead to Chinese influence in decisions involving the relocation of the Sungai Besi air base with possible implications on national security and sovereignty. This influence may possibly involve pushing for lower costs to relocate the air base, he said.
However, the relocation process had already seen contractors appointed and approved by relevant authorities, said 1MDB. “As the construction will continue to be carried out by the current approved contractors, there is therefore no question of any impact on national security,” said 1MDB.
However, the relocation costs may not be final as 1MDB said both sides still need to determine and agree on the final costs involved.
To recap, 1MDB via its subsidiary TRX City contracted Perbadanan Perwira Hartanah Malaysia (PPHM) as the turnkey contractor to deliver the construction aspects of the air base relocation. PPHM is a wholly owned subsidiary of Lembaga Tabung Angkatan Tentera (LTAT).
In turn, PPHM has appointed over 50 qualified bumiputera contractors as subcontractors to undertake various aspects of the construction, said 1MDB. “The remaining construction costs plus variation orders plus other costs of the relocation are currently estimated at up to RM1.9 billion,” 1MDB added.
“It is important to highlight that PPHM as the turnkey contractor and the over 50 Bumiputra subcontractors will continue to remain as the designated contractors and will continue to perform their roles exclusively, regardless of the final deal structure,” said 1MDB.
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