JPMorgan and CIMB have scored something of a bull's eye by being awarded a key mandate from Khazanah Nasional - the investment holding arm of the Malaysian government. The mandate is open ended at the moment with sources saying an equity sale is likely to happen in one of four separate stocks - Telekom Malaysia, Tenaga Nasional, Astro AllAsia Networks or PLUS Expressways. No decision has yet been made as to which stock Khazanah will end up selling.
Similarly no decision has been made about the method of disposal. Many banks have been to see Khazanah, most recently in a beauty parade last month in which a number of complex deal structures were proposed including multi exchangeable bonds. However, it is understood that Khazanah is looking to do either a straight equity placement, a straight exchangeable or a combination of equity and exchangeable such as Temasek did with SingTel earlier in the year.
According to market sources, the eventual method of disposal will depend on which stock is selected to be sold.
The four stocks being considered are the four largest and most liquid stocks in the Khazanah portfolio. Therefore any disposal will help achieve its target of reducing the concentration of these stocks in the portfolio. Reducing this concentration is a key strategy for Khazanah under the new leadership of Encik Azman Mokhtar, who became CEO of the company in June this year.
All four stocks have performed very well over the last few months. Tenaga, Telekom and PLUS are all trading at their year-to-date highs, having risen 6.2%, 4.2% and 15% in the last two months alone. Astro is just shy of its year highs having risen by 9.5% in the past two months.
Given international investors' newfound love affair with Malaysia, buyers for the stake(s) should be easy to find. Sources suggest that any deal will be in the range of $500 million to $800 million and is likely to be completed by the end of this year, market conditions permitting.
Most market gossip has suggested that a deal for PLUS is the most likely, given that the company has been on a non-deal road show to Hong Kong and Singapore in recent months, organized by JPMorgan. While this assumption is natural, it is not entirely correct. Anything that PLUS does on the equity side will run up against covenants it has on the debt side. A coordinated deal involving equity and debt seems the most logical way for adding liquidity to the stock and unleashing some value.
Other factors likely to determine which stock gets sold include ongoing discussions Tenaga is having with the government over raising its tariff rates. The company is keen to raise the rates it charges its consumers, but the government is understood to want to see more internal improvements in the company before rewarding it with any such tariff hikes. A resolution of this issue prior to a stake sale would see necessary.
Telekom has had a good run since Khazanah did its most recent placement in March this year when it sold 300 million shares at RM9.70 to raise RM2.91 billion. Although investors have made almost 26% on that trade, they might not welcome more stock in such a short space of time.
For JPMorgan and CIMB, the mandate cements an already strong relationship with Khazanah, but one that was open for renewal given there are new people in charge of the agency. As the banks are well aware, there are many other houses waiting in the wings to do deals with Khazanah if they fail to deliver. Khazanah is now easily the most important relationship to have in Malaysia.