By Khairie Hisyam
After overpaying by billions for its power assets several years ago, 1MDB now seeks to divest them as part of its rationalisation plan. However, it is likely to sell at a loss given the current valuation of the assets.
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When blue chip utilities player Tenaga Nasional Bhd announced it is eyeing 1Malaysia Development Bhd’s (1MDB) power assets on July 15, the market didn’t take it well. The counter, still correcting after an all-time high of RM15.10 per share in January, fell 3% to RM12.36 per share the next day and eventually hit nearly a two-year low at RM10.36 per share in late August.
Such was the concern over a potentially bad deal for Tenaga Nasional in the proposed deal – the term “bailout” rolled easily off the tongue given Tenaga Nasional ultimately counts a common shareholder with cash strapped 1MDB in the Finance Ministry, which wholly owns 1MDB and holds 30% in Tenaga Nasional via Khazanah Nasional Bhd.
On the other hand, the power assets held under Edra Global Energy remain sizeable and, on account of its power purchase agreement (PPAs) for those assets, lucrative.
According to its website, Edra owns full or partial stakes in a total of 13 power plants (see table), five of which are in Peninsular Malaysia. Collectively, these assets boast 8,776 megawatts (MW) in total generation capacity, of which 3,652MW are in Malaysia, not including its upcoming Track 4B power plant project.
This makes Edra the second-largest power producer in the Malaysian power sector, just ahead of recently relisted Malakoff Corp Bhd.
For Tenaga Nasional, adding Edra’s stable of power assets to its own would be a “strong fit” to its growth strategy, it said in July. “As the country’s largest power producer, no other bidder knows these assets better than Tenaga,” said president and chief executive officer Azman Mohd on Oct 6, adding this makes Tenaga Nasional the “best and most logical” buyer.
The pressing concern then is for Tenaga Nasional, and any other potential buyer for that matter, to buy the power assets at the right price.
Azman Mohd
Appraising the value of power plants can be a complex affair, requiring extensive information on relevant PPAs – which is covered by the Official Secrets Act 1972 – as well as cash flow and other details.
In the case of Edra, a simpler way would be to look at how much 1MDB paid for its power assets in the first place. And herein lies a contentious issue from several years past when it indulged in an acquisition spree that gave birth to Malaysia’s second-largest independent power producer.
1MDB’s acquisition trail
Most of 1MDB’s power assets were acquired within a 16-month time frame between March 2012 and July 2013. By conservative estimates the company, forking out RM12 billion or so overall, overpaid by some RM3 billion.
The first acquisition was made in March 2012 when 1MDB paid RM8.5 billion to buy over tycoon Ananda Krishnan’s Tanjong Energy Holdings, which is now known as Powertek Energy Group.
However, this raised eyebrows at the time as just two years prior Ananda had taken the Tanjong Group private at a valuation of RM8.8 billion. While the valuation seems similar, an important point was the original Tanjong Group comprised not only power assets but also gaming and other businesses.
After the privatisation, Ananda then sold off the gaming components for RM2.1 billion to a consortium which, among others, comprised businesspeople William Cheng of Lion group, Quek Leng Chan of Hong Leong group and Lim Kok Thay of Genting group.
Simple arithmetic meant the power assets under Tanjong must have been less than RM6.7 billion in value and closer to RM6 billion as Tanjong had other assets besides gaming and power, compared to what 1MDB paid. In other words, for its first acquisition 1MDB would have overpaid by at least RM1.8 billion and by as much as RM2.5 billion.
Five months later, 1MDB announced it was buying Genting Group’s power assets held under Mastika Lagenda Sdn Bhd for RM2.3 billion. However, at the time this also raised concerns as the power supply concession for the power assets was expiring by February 2016.
This sparked questions of whether this is another overpriced deal. In a separate announcement, Genting stated it expects to “record a one-off net gain of approximately RM1.9 billion from the proposed disposals”.
While the power supply concession for the Genting power assets had since been extended by 10 years to 2026, it is unclear whether 1MDB had prior knowledge of this when undertaking the acquisition.
Industry sources say the terms for extension of the concession were made at a low purchase price for power which would have cut the Genting power assets valuation to about RM1 billion, implying an overvaluation of RM1.3 billion.
Nearly one year later in July 2013, 1MDB announced its acquisition of a 75% stake in Jimah Energy Ventures Holdings for RM1.23 billion. Most market observers agree, however, that this particular acquisition seem priced at fair market value.
In any case, the premium paid for the power assets showed in 1MDB’s annual reports. For the financial year ended March 31, 2013, during which it bought the Genting and Jimah power assets, 1MDB recorded some RM1.2 billion in impairment assessment for goodwill, though it did not specify to which acquisition in particular.
Taken together, the emerging picture is 1MDB generously overpaid by RM3.1 billion to RM3.8 billion when it should have paid between RM 8.2 billion and RM8.9 billion for the three acquisitions collectively instead of RM12 billion.
Valuing Edra
So how much would a fair valuation of Edra be? The question hinges on how much would its upcoming power plant in Malacca be worth on top of its existing power assets, while also bearing in mind that any buyer would also have to assume some RM6 billion in Edra’s existing debt.
After the three acquisitions between 2012 and 2013, 1MDB subsequently built on its acquired track record to bid successfully for two new power plant concessions.
The first, won in February 2014, was codenamed Track 3B and entails two coal-fired power plants in Jimah, Negeri Sembilan with total generation capacity of 2,000MW.
However, liquidity issues, which cast doubt on its capability to undertake the project, forced 1MDB to sell its 70% stake in Track 3B to Tenaga Nasional for RM47 million, a transaction completed in July this year. Its partner Mitsui & Co, however, retains its 30% stake in the project.
The second is codenamed Track 4B, which was reportedly awarded in August 2014. To be located in Malacca, the facility would have a generation capacity of up to 2,400MW.
It is tricky to put a valuation on a power plant that has not yet been built – it would depend crucially on what the power purchase agreement will be. Sources say the power purchase price has not been determined yet but it could be based on the price for what Tenaga Nasional got for the Prai power plant.
If that is used as a benchmark, the value of the project may not be that high. Recall that Edra sold 70% of 3B to Tenaga Nasional for RM47 million.
If we were to be generous and put a value of RM1 billion on 4B, the range of value for 1MDB would rise to RM9.2 billion to RM9.9 billion. And it could come in lower if we were to take into account that most of the concession periods have been shortened by several years since 1MDB purchased them. The analysis, however, excludes debt of RM6 billion in Edra.
This, however, is a very simplistic analysis in the absence of further technical details which would be available to the three bidding parties when conducting their due diligence on Edra power assets. Depending on what is disclosed these details may impact the true valuation of the assets.
Three things are, however, plainly obvious from this analysis: Firstly, if anyone pays significantly above the base valuation scenario of RM8.2 billion, there may well be concessions made in terms of the 4B project and/or in some other way.
Secondly, almost certainly 1MDB will incur a substantial loss on the sale which it is going to be very hard put to explain.
If Tenaga Nasional does not win the bid, there is bound to be explanations demanded and questions raised. If the foreign firm chosen is able to give a higher price than Tenaga Nasional, questions will be asked too – how come they can?
Yesterday: 1MDB power assets come full circle
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