Halim unlikely to get green light for PLUS bid

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Sources tell KiniBiz the deal is unlikely to be approved by the government because of a number of factors, including non-viability of the project. We then outline the major obstacles Halim faces to make his deal a success.

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The government is unlikely to approve a bid by former United Engineers Malaysia (UEM)-Renong chief Halim Saad for Plus Malaysia Bhd, the concessionaire for the North-South Expressway and several other highways.

Sources say that this is because the numbers in Halim’s proposal, presented by PwC Capital, a unit of audit firm PwC, are not likely to lead to a viable proposal, they said.  Halim is working with Lembaga Tabung Haji on this deal.

However, Halim Saad told KiniBiz earlier today that he has not heard so far that the government has turned down the deal. In his presentation, Halim had sought government approval to do a due diligence on PLUS before he makes an offer. Halim declined to give any further comment.

Analysts say that shareholders’ funds or equity of PLUS currently amount to some RM3.4 billion while total debt, basically sukuk bonds issued in January 2012, amount to some RM30.6 billion, making in all a total value currently of about RM34 billion.

When PLUS was taken private at the end of 2011 via  a special purpose vehicle 51% owned by United Engineers (Malaysia) Bhd (UEM) and 49% by the Employees Provident Fund (EPF), the equity was valued at RM23 billion, and including debt of RM8 billion, the total value of the deal was RM31 billion.

UEM is wholly owned by government investment arm Khazanah Nasional Bhd, which is in turn wholly owned by the government. The EPF is a retirement fund for workers in Malaysia which has over 13 million members currently and over a half a trillion ringgit in funds.

How much is PLUS worth?

One question that arises is whether former UEM-Renong chief Halim Saad can afford the purchase, given that his previous attempt — offering RM50 billion for PLUS and other concessionaires — did not even materialise.

How much does Halim need to acquire PLUS if both UEM and EPF, co-owners of PLUS Malaysia Berhad, are selling? To answer the question it is imperative to look at the value of PLUS.

When UEM and EPF took then-listed PLUS Expressways Berhad (PEB) private in 2010, the partners collectively paid RM23 billion for the toll concessionaire’s assets and liabilities. Apart from the RM23 billion price tag for its assets and liabilities, PEB also had debts amounting to RM8 billion.

At around the same time, a company called Jelas Ulung Sdn Bhd, linked to Halim Saad, emerged with an offer of RM26 billion for PEB. However Jelas Ulung was out of contention after PEB asked all interested offerors to place an earnest deposit of RM50 million as well as an unconditional letter of undertaking from financial institutions that the offeror can afford the purchase.

In total, it cost UEM and EPF some RM31 billion to acquire PEB at the time. Is this price tag still reflective of PLUS’ worth today?

It is worth noting however that on Nov 29, 2011, one year after PEB was taken private, its assets were sold to PLUS Malaysia Berhad, a special purpose vehicle set-up by UEM and EPF. UEM held 51% of PLUS Malaysia while EPF held the remaining 49%.

At roughly the same time, PLUS Malaysia Bhd issued the world’s largest sukuk valued at RM30.6 billion in January 2012. The purpose of the sukuk was to fund capital expenditure, working capital and other general funding requirements, said PLUS.

Also worth mentioning is that based on PLUS Malaysia’s balance sheet filed with the companies commission, in financial year ended Dec 2011 the company had RM36 billion in short-term debts and RM567.8 million in long-term debts. However in the following financial year, FY12, PLUS Malaysia had RM31.22 billion in long-term debts and RM1.19 billion in short-term debts.

The emerging picture is that after the UEM-EPF joint venture acquired PEB for a total of RM31 billion, their special purpose vehicle PLUS Malaysia then took a bridging loan of RM36 billion to buy PEB’s assets from UEM and EPF. PLUS Malaysia then issued a sukuk of RM30.6 billion to repay that loan.

According to analysts the equity of PLUS Malaysia now stands at RM3.4 billion while PLUS Malaysia’s long-term debts are at RM30.6 billion, mainly the sukuk. To acquire PLUS now means an estimated price tag of about RM34 billion, before any premium that UEM and EPF are likely to demand.

How much does Halim need to pay?

One possibility that emerges is that Halim can just pay for PLUS Malaysia’s equity portion and then assume the company’s debt obligations.

If this happens then the entire deal becomes more manageable for Halim. Instead of having to raise RM34 billion, he only needs to fork out RM3.4 billion plus a premium to buy PLUS Malaysia’s equity and then ensure the concessionaire makes more than enough to service its debt obligations and cover its operating costs in order to turn a profit.

This scenario fits in with the financial muscle of Lembaga Tabung Haji, Halim’s intended partner in the deal. The pilgrimage fund  has RM43 billion in fund size as at end-2013 and it certainly cannot sink a bulk of that into one single investment.

However, this scenario is not possible due to the terms of  the sukuk issued by PLUS Malaysia in 2012.

The terms stipulate that if there is a change in the major shareholders of the company, the debts would have to be refinanced.

This means that Halim cannot sidestep the debt obligations of PLUS Malaysia in acquiring the company. If he pays for the equity portion only, the change in major shareholding would trigger a compulsory refinancing and that raises the issue of whether Halim can get the same financing terms as UEM and EPF did which was 7%. Analysts think the financing rate might be higher.

According to analysts, PLUS’s revenue in 2013 was about RM3.2 billion. Charges on the sukuk  alone would amount to RM2.1 billion while operating expenditure is expected to be around RM700 million, leaving a small surplus of about RM400 million. From this, tax will have to be paid and any other expenses.

Maintenance costs are likely to increase, one analyst said, as oil price increases affect prices of bitumen, a major component cost in road maintenance. That is likely to leave very little surplus for a new investor, especially if he is to pay a significant premium for the equity portion and refinance debt at a higher rate.

However, other analysts point out that at the original cost of acquisition, the project internal rate of return (IRR, the financially correct way to measure return over the lifetime of a project) was 10% over the concession period on the North-South Expressway, PLUS’ main asset, to 2038.

Thus, if the cost of financing is significantly lower than that, it is still possible to make a bid for PLUS and come out on top.

Will the government let Halim buy PLUS?

However, it is not likely to succeed without government intervention or an attractive deal to existing shareholders of PLUS – UEM and EPF. While UEM is effectively government-owned, EPF is a retirement fund whose obligation is to the members. While the government has substantial authority over the EPF, sources felt it was unlikely the government, specifically the finance ministry, will use this to force EPF’s hand.

On the other hand, if the government forces both shareholders to give way and make a bid, then it will be letting a private party in and make a profit, assuming that is the only reason a private party, albeit one closely linked to PLUS, will bid in the first place.

Halim was the prime mover behind the earlier PLUS in those early days when he used UEM and Renong to control the highway concessionaire, made it a thriving business and ventured into a whole lot of other things.

Post the financial crisis of 1997/98, the government forced him out of UEM/Renong and launched a rescue of the entire group, eventually privatising UEM in the process. Recently Halim took a RM2 billion court case against the government over the issue. He lost the first round and said he plans to appeal.

One sore point with many observers is a put option that Halim gave UEM over its purchase of a 32.5% stake in Renong for RM3.2 billion. The put option (the right for UEM to sell Renong shares to Halim at RM3.24 a share plus holding costs) was valued at RM2.4 billion, based on the difference between the market price of Renong at the expiry of the put and the option price.

It remains an unsolved mystery to this day why UEM did not exercise the put option against Halim and instead cancelled it on Nov 21, 2001.

If any bid is to succeed, based on the premise that it would benefit the rakyat, it needs not only the government’s blessing but the changing of the terms of contract already agreed upon, especially with respect to adjusting toll rates in future.

The government may be able to easily cancel a contract with a company that it wholly owns but it certainly can’t do that with impunity for a retirement fund, EPF, which has over 13 million members, especially if it adversely affects EPF’s returns.

Before the government takes such a drastic action, it would have to consider if the deal is net beneficial to the rakyat. Is Halim’s proposed Rakyat-friendly toll scheme feasible?

Tomorrow: Is Halim’s deal for PLUS net beneficial to the rakyat?