By Jose Barrock
The Selangor state investment arm, Kumpulan Darul Ehsan Bhd (KDEB)’s RM9.65 billion offer to consolidate the water sector seems to have hit a brick wall yet again, with two of the important players, Puncak Niaga Holdings Bhd and Gamuda Bhd declining to accept the offers made.
This confirms a Kinibiz story earlier this month that the water consolidation exercise had hit a snag.
In an announcement to the bourse yesterday, Puncak which has two concessions, one to treat water under wholly owned Puncak Niaga (M) Sdn Bhd (PNSB) and another under 70% controlled Syarikat Bekalan Air Selangor Sdn Bhd (Syabas) which has the mandate to distribute water in Selangor, Kuala Lumpur and Putrajaya, basically shafted Selangor’s offer saying that there was insufficient information provided.
Puncak said that its board had “expressed great concern on the indicative terms of the offer” and the responses to queries it had made, from KDEB, the Selangor State Government and PAAB.
In a nutshell, Puncak’s grouses are that the net proceeds that it will receive from KDEB for the proposed purchase of PNSB and Syabas amounts to RM1.55 billion only, in contrast to the total equity value of RM5.59 billion as stated in the offers from KDEB.
The bone of contention is that “There shall be no further consideration to be paid to Puncak apart from the proposed RM1.55 billion,” Puncak said in its announcement to the bourse.
Another grouse of Puncak’s is that the amount of consideration payable is still subject to due diligence to be undertaken post acceptance.
The water outfit, Puncak, added that PAAB had only verbally agreed in principle to take over the water assets of PNSB and Syabas at the total value of RM4.04 billion.
Another major issue is with a 37% and 25% tariff hike respectively slated for 2009 and 2012, as per Puncak’s concession agreement which had been opposed by the state.
In response to Syabas’ claims for compensation on the two tariff hikes, the Menteri Besar of Selangor Khalid Ibrahim had said that since the issue was still being heard at the Kuala Lumpur High Court, “the Selangor State Government is not able to give any confirmation on the payment of the said compensation.”
Puncak’s outstanding liabilities as at end December 2012 (due from PNSB and Syabas) to Acqua SPV Bhd, which is PAAB’s unit amounted to RM3.91 billion, and had to be fully resolved regardless of any offer or mechanism to be implemented in the proposed consolidation.
PAAB in response to queries by Puncak had said that the mechanisms and details of the proposed offers should be discussed and clarified between the KDEB and Puncak only, and that any queries on the proposed offers should be forwarded to KDEB only.
“The response from PAAB clearly contradicts the response from KDEB,” Puncak said.
Puncak meanwhile said that it was willing to accept the offers provided that KDEB agreed to a total equity contribution to be paid to Puncak including a compounded return of 15% per annum taken as compensation to Puncak for the loss of future income as a result of the sale of its water concession business, and that the receivables due and outstanding from Syabas to PNSB at the effective date of the sale shall be paid to Puncak.
Other terms of Puncak include any and all residual cash in PNSB and Syabas be paid to Puncak, the removal for the requirement of due diligence post acceptance of the offers, and a waiver of the requirement for the acquisition of the water assets by PAAB concurrently with the acquisition of the equity by KDEB.
“As KDEB is acquiring the equity of the water concession companies, the concession holders should be paid first on the agreed price by KDEB, and KDEB can then separately settle its arrangement with PAAB for PAAB to take over the water assets and assume the borrowings,” Puncak added.
Gamuda meanwhile has 40% equity interest in water treatment company Syarikat Pengeluar Air Selangor Holdings Bhd (Splash), and was that it was unable to consider the offer due to three reasons, namely a key component in the earlier offer letter dated 20 February 2013 being removed—namely the payment of Splash’s surplus book value of assets over liabilities which has resulted in the substantial amount of surplus assets of Splash not being added to the offer, the valuation methodology of using a return on Splash’s equity of 12% per annum is not fair as it does not take into account the remaining tenure of Splash’s concession and that KDEB had not indicated in its offer if it will retain the existing operations and maintenance operators of Splash at existing terms after the completion of the proposed purchase.
Gamuda however added that it will “continue to seek further clarifications on the matters raised… for all parties involved to reach mutually agreed terms and conditions…subject to all matters being satisfactorily concluded and agreed upon, is willing to pursue an agreement with KDEB.”
Splash’s other shareholders are Kumpulan Perangsang Selangor Bhd (KPS) a unit of KDEB and The Sweet Water Alliance, a company linked to businessman Wan Azmi Wan Hamzah.
The only other sizeable water player is Konsortium Abass Sdn Bhd which is almost wholly owned by the state.
Basically the water industry hinges on the three treatment companies, PNSB, Splash and Konsortium Abass selling treated water to Syabas to distribute.
However without the two tariff hikes, 37% in 2009 and 25% in 2012, Syabas has been unable to pay the treatment companies.
The state government stated that Puncak had not fulfilled its end of the bargain and had not complied with the terms of its concession agreement.
Meanwhile Syabas is suing the state government for RM2.97 billion in claims.
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