What does Splash want in water deal?

By Khairul Khalid

The battle between Selangor and Splash (Syarikat Pengeluar Air Selangor) is threatening to drag on with neither party giving in. KiniBiz talks to Wong Mun Keong, a director of The Sweetwater Alliance (a 30% shareholder of Splash) for his take on Selangor’s latest offer.

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Following the recent joint announcement by Selangor Menteri Besar (MB) Abdul Khalid Ibrahim and minister of Kettha (energy, green technology and water) Maximus Johnity Ongkili that a RM5.6 billion takeover of Puncak Niaga and Syabas is imminent, focus has shifted to the battle between the state and water concessionaire Splash (Syarikat Pengeluar Air Selangor).

“There will be no further negotiations with Splash. Our offer will still be the same. If they don’t comply, we will use WSIA (Water Services Industry Act) on them,” Khalid reportedly said after a state executive councillor (exco) meeting last week.

Section 114 of WSIA allows for a forced takeover of the water concessionaires for national interest. Nevertheless, despite the cabinet’s approval of WSIA, there has been reluctance by the federal government to enforce it.

On the other hand, chairman of Splash Wan Azmi Wan Hamzah has been resolute in his stand on the water takeover.

“They (Selangor state) will almost certainly provoke a legal response if they decide to use WSIA. We won’t be appealing to the state government, just like Rozali Ismail (CEO of Puncak Niaga and Syabas) did. We shall not submit on bended knees. They will have to break us down,” said Wan Azmi to KiniBiz.

With neither parties budging in the standoff between the Selangor state and Splash, what will it take for them to reach a compromise?

There are divergent views on the impasse. Some quarters feel that the water concessionaires are just plain greedy by holding out for more money. On the flipside, the prospect of a forced government takeover of private entities has caused some unease in the commercial sector.

There are some major sticking points in Splash’s contention, as KiniBiz has pointed out in the previous part, but at the heart of the matter is Selangor’s valuation of Splash in its offer to buy out the water concessionaire.

Splash is 40% owned by Gamuda, 30% by Kumpulan Perangsang Selangor (a unit of KDEB – Kumpulan Darul Ehsan Bhd, owned by the Selangor government) and 30% by The Sweetwater Alliance, a company controlled by Wan Azmi.

KiniBiz has repeatedly requested for interviews with Khalid, Ongkili and Puncak Niaga & Syabas CEO (chief executive officer) Rozali Ismail to get their respective views on the latest developments of the water saga without success.

Recently, KiniBiz managed to  speak to Wong Mun Keong, a director of Sweetwater Alliance for his views on the negotiations impasse between Selangor and Splash. Here are some excerpts of our interview:

KiniBiz: How is Selangor’s last offer (that Splash has rejected) of RM250 million calculated?

Wong: Splash invested RM400 million in equity capital when we started the business. This includes RM50 million ordinary shares and another RM350 million other classes of shares such as convertible loan stocks.

They (Selangor) have basically taken this RM400 million and say that we have invested it for the last 14 years, impute 12% per annum returns less the dividends that have been paid out. Therefore, the end result is RM250 million.

So, basically the current offer is they (Selangor) pay you RM250 million for our shares, we transfer the assets to them and we will have to leave. That’s it. For our current equity or net book value (NBV) of RM2.5 billion we are getting RM250 million, which is only 10% of  NBV.

It’s a mechanistic way of calculating it, without any reference to the type of the business we are doing and the conditions of the business at the point time. It also doesn’t take into consideration whether we’ve done well or not, or made losses or profits in running the company.

KiniBiz: What do you mean mechanistic?

Wong: Khalid shouldn’t try and justify the valuation by saying that Splash is greedy, has made too much money and all that. He should also bear in mind the risks we took when we began the project.

Nobody was in our shoes when we started the business and encountered difficulties, for example when we were negotiating interest rates shot up to 15% and all the bankers shaking their heads saying that there was no liquidity in the system to fund this kind of project. After the Asian financial crisis, this was the first big project that was started and there was a tremendous amount of business risk we had to undertake.

If the Sungai Selangor Dam suddenly leaks or cracks tomorrow, we are still obliged to repair it under the contract. We would have to use our own money to do it. We wouldn’t be able ask for the government’s help financially.

We need to protect the value of our concession and observe our agreements with our subcontractors.

KiniBiz: What is Splash asking for?

Wong:  Splash’s book value is RM2.5 billion and should be the floor price for negotiations. If we accept RM250 million we would have to book in a loss of RM900 million. That would be unacceptable to the shareholders of a public listed company like Gamuda.

What we want is the discounted cash flow value (DCF) of the remaining 16 years of our concession. We have managed the company well, but the cream is yet to come. Arguably, Splash would be giving up the best 16 years of its contract. The DCF for the remaining 16 years according to the calculations of an independent advisor is RM3.5 billion.

KiniBiz: But why use DCF  for valuation?

Wong: Typically, in the early years of a project of this magnitude, there are huge loan repayments to service and other expenses. There’s this massive negative investment here that nobody talks about.

It’s only somewhere after the 10th – 12th year that you start getting surplus cash  flows. We have reached this point. You can say that we have been profitable in the last 14 years because we have managed the company well.

For example, if you go and buy shares in Genting, are you buying because of the profits they made in the past 30 years, or would it because of the profits they are going to make in the next 30 years? If you are looking to buy into a business, you have to look forward. Any analyst would use this method to value the deal.

So, the current offer is not very commensurate with the risk. The good times are just coming. What would I give it up for? Like I said before, the RM2.5 billion is a floor value. Bear in mind that 30% of that is theirs (the Selangor state’s).

(Wong also indicated that there is clause in the concession agreement that allows for the Selangor state government to expropriate the water concessionaires’ assets in national interest. He stated that the compensation due to Splash under the formula in this clause would probably be lower than its current NBV of RM2.5 billion. KiniBiz will explore this matter further in tomorrow’s issue.)

KiniBiz: Why is Splash upset with Selangor’s offer to Syabas?

Wong: We all know Puncak is a profitable company with a NAV (net asset value) of about RM1.6 billion. The state is still giving them 0.7 times book value.

But take a look at Syabas. They have a huge negative book value, yet the Selangor government are offering them a positive amount. So if you look at the combined group, the state is actually paying them 6.5 times more. Why is that so?

These are the guys that the state has said all along are misbehaving and causing problems all along in the water industry. They also have huge trade payables and negative reserves.

Why are they paying Syabas, a technically insolvent company RM440 million? Yet, they are offering Splash that has done its job well just RM250 million. It doesn’t make sense.

KiniBiz: Would Splash be open to arbitration?

Wong: Khalid has trumpeted using international arbitration for so long but the clause is restricted to using his formula. So essentially what he wants us to do is to go all the way to London, just to see whether others can arrive to his numbers using his flawed formula. What’s the point of doing that?

We wrote back to the Khalid and Ongkili several times and pleaded with them to be fair in the valuation. Most arbitration panels would say let the experts determine the best methods of valuation.

Yesterday: Selangor vs Splash – another deadlock?

Tomorrow: Looking ahead – what are Khalid’s options?