By Khairul Khalid
Will Selangor have any aces left up their their sleeves in the current standoff with Splash? KiniBiz looks at the options available for Selangor Menteri Besar (MB) Khalid Ibrahim in concluding this longstanding water saga.
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Will there ever be closure in Selangor’s water restructuring saga? The federal and state governments have recently announced an imminent RM5.6 billion takeover of Puncak Niaga and Syabas (Syarikat Bekalan Air Selangor).
Selangor Menteri Besar (MB) Abdul Khalid Ibrahim has declared that the water restructuring will be completed by November this year.
However, his job is not exactly finished. The MB’s final hurdle in this longstanding tussle for control of Selangor’s water industry now seems to be negotiating the buyout terms of Splash (Syarikat Pengeluar Air Selangor).
Splash Holdings, the holding company of Splash Bhd, 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 Wan Hamzah.
The main bone of contention is the valuation of Splash that KiniBiz has covered in previous parts. Basically, Selangor is offering RM250 million to Splash, only 10% of the company’s current net book value of RM2.5 billion.
Both parties have so far stuck to their guns. Splash is insisting on their current valuation of RM2.5 billion as a starting point for negotiations. Khalid has reiterated that he will not be offering Splash anything more and promised to use WSIA on if they can’t come to terms.
What are Khalid’s options in what seems like the final hurdle in consolidation of Selangor’s water assets?
Will Selangor offer Splash more money?
The MB has been adamant so far that the state’s offer is final and that Splash will not be offered more money.
By most accounts, Splash has been a well-managed and profitable company. It started with RM50 million shareholders’ equity 14 years ago and this remains the same today. In addition it also has loan stock, which Splash says is roughly equivalent to preference shares.
If just a RM50 million equity is considered, Splash is an extremely profitable company. The company made net profits of RM297 million and RM365 million in the financial years 2013 and 2012 respectively. It has also paid approximately RM600 million in dividends over the years.
It has shareholders’ funds of RM2.5 billion currently according to Splash officials, 50 times the original equity of RM50 million. This has led to contentions by some that Splash has been given too much of a good deal, which may explain why the Selangor state has been parsimonious with its offer.
However, Wong Mun Keong, director of Sweetwater Alliance that owns 30% of Splash, says if the state has evidence of any criminal practices in terms of the award of the concession, it should take appropriate action. Otherwise it should honour the concession.
He says that the total amount of loan stock still stands at RM350 million and this is owned by shareholders. Effectively, he continues, this is equity and lenders recognise it as such when they specify minimum gearing requirements, adding that the figure is not in dispute with the Selangor government. If the loan stock is included under equity, total shareholders’ capital becomes RM400 million. Thus current shareholders funds of RM2.5 billion is 6.25 times the original capital of RM400 million.
Wong insists that the risks at the time were high. He also concedes that terms in the concession agreement for expropriation say that the assets can be acquired for a return on equity of 12% for the concession so far, less dividends paid, and the remaining assets acquired at their cost. However Wong said he does not know what the figure will be under that scenario.
Nevertheless, the state’s offer to Syabas that is highly disproportionate to its book value has raised eyebrows.
That might force Khalid to return to the bargaining table with Splash. Most analysts have cited PAAB’s (Pengurusan Aset Air Berhad) previous cases in consolidating water assets in other states as the benchmark for valuing the water concessionaires.
Since 2008, PAAB has been successful in migrating the water assets in Melaka, Negri Sembilan, Johor, Perlis, Penang and Perak in deals totaling RM8 billion in value.
“A consistent methodology (of 1x net book value or NBV) has been applied throughout the other states. This, we believe, may be the winning formula. We therefore opine that the governments would be successful in unlocking the deadlock if the same method is applied to Selangor. Implicitly, the 1x NBV method is seen as fair, consistent and importantly, appears to abide to the spirit of ‘willing buyer, willing seller’ principle,” said an analyst report by Affin Bank.
Whether Khalid will agree to meet Splash’s full valuation remains to be seen but Splash has indicated that they are open to negotiation. It would seem that some compromise on both sides is required to solve the impasse.
RM2 billion top-up still possible
When the MOU (memorandum) of understanding between Selangor and Putrajaya, one of the terms was a RM2 billion allocation by Putrajaya to facilitate the state takeover of the water concessionaires.
Details are scant on how Putrajaya would utilise this RM2 billion and whether it would be “topped-up” by the federal government in addition to the state’s RM9.65 billion offer. The state has denied that it is a top-up but so far it has not been elaborated neither by state nor federal governments.
However, some analysts believe that this could be the key in reaching a compromise.
“If the RM2 billion is used as a top-up, total offer for the three water concessionaires (Puncak Niaga, Splash and Abasss) is approximately RM3.9 billion. We have excluded Syabas as its NBV is –RM1.9 billion. Based on the estimated NBV of RM4.4 billion for the three concessionaires, this implies that Puncak Niaga and Gamuda may take a 12% haircut. Whilst not ideal from a commercial standpoint, we believe the concessionaires may be cajoled to accept this deal – which is viewed as consistent and fair in terms of valuation method,” said Affin.
According to a CIMB analyst report, a revised offer based on the RM2 billion top-up could be as much as 88% of the respective water concessionaires NAV (net asset value) including Splash.
“The biggest beneficiary of a valuation top-up could be Gamuda, as the potential revised takeover offer for the 40%-owned Splash could be as much as RM2.2 billion compared to the rejected RM251 million cash offer by the state government which is less than 10% of Splash’s NAV,” said CIMB.
Is WSIA still on the cards?
Despite receiving cabinet approval for WSIA, both federal and state governments have been indecisive in actually implementing it.
However, Khalid has continued to talk tough and indicated that he would use WSIA is Splash doesn’t agree soon.
Khalid Ibrahim
“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 recently.
On the other hand, Splash has responded by saying that they would consider legal action if they are forcibly taken over under WSIA (Water Sevices Industry Act) without adequate compensation.
Earlier on, WSIA seemed like the MB’s secret weapon to put an end to the saga. Khalid had even trumpeted a savings of RM2 billion for the state following WSIA invocation by the federal government.
However, he has since reversed his decision and allowed the concessionaires to accept a deal instead of being forcibly taken over through WSIA.
The wavering by both Selangor and Putrajaya has left many unconvinced that WSIA will actually be imposed. This could be one of the reasons the water concessionaires have been emboldened in their stance to hold out for more compensation.
Some sources have informed KiniBiz of unconfirmed last- ditch negotiations between Puncak officials and the governments for a higher payoff, despite Khalid and Ongkili declaring an agreement that could soon see a takeover of Puncak Niaga and Syabas.
Another matter possibly complicating the enforcement of WSIA is the different interpretations of section 114.
Although Khalid has insisted that it allows for the takeover of ownership of the water assets, others including minister of Kettha (energy, green technology and water) Maximus Johnity Ongkili have said that it only permits the transfer of management and administrative authority to the federal government.
Regardless, Splash has confirmed that so far it has not been informed of a WSIA takeover by the government.
“We have not been officially informed. How serious are they? They have not even talked to us about the details of a WSIA takeover,” said Wan Azmi to KiniBiz.
Selangor could expropriate water assets
Apart from the forced takeover of water assets Putrajaya through WSIA, there is also the possibility of a state expropriation in a clause under the concession agreement.
“If they see it necessary, the state government should expropriate us properly and according to the terms under the concessionaires agreement instead of hiding behind WSIA and the federal government,” said Wan Azmi.
Wong also confirms this and adds that a valuation under the state expropriation clause would probably be lower than Splash’s current book value of RM2.5 billion.
Nevertheless, Wong confirms that the state government has never discussed triggering the state expropriation clause in negotiations so far.
Could Splash be allowed to continue?
Another scenario that has not been discussed much is the possibility of allowing Splash to continue operating, even after Puncak Niaga and Syabas has been taken over.
One of Splash’s arguments is that they have been prudent and performed according to the requirement of their concession agreements. An option could be to allow Splash to continue serving, at least for the tenure of their contract, after state has taken control of Puncak Niaga and Syabas.
This could allow all parties to move on and avoid another protracted battle. However, Splash confirms that this has not been discussed either but they are open to negotiations
“Hopefully Khalid will do the right thing. If there was a genuine problem I would have expected them to contact us and discuss the issue,” said Wan Azmi.
Yesterday: What does Splash want in water deal?
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