No time for Time

InvestorsÆ lacklustre reaction to the IPO of Time dotCom is a reflection as much on Malaysia Inc as the stock.

If stock exchanges are the opinion polls of economic policies, then major IPOs are the general elections of finance. When a major initial public offer (IPO) is launched, both domestic and foreign investors are given the opportunity to ‘put up or shut up’. In the case of Time dotCom’s IPO in Malaysia, investors have voiced their opinion. And for the Malaysian government it can scarcely be said to be positive.

The IPO of Time dotCom was designed to raise cash to pay down some of its M$5 billion ($1.32 billion) debt pile. However, only 25% of the deal was subscribed. If you exclude the stock that was privately placed, the amount subscribed by individuals is an even lower at 10%.

The failure of the deal, which was priced at M$3.30 a share, can only be understood in the context of corporate Malaysia. Time dotCom is a part of the Renong group, the highly political business empire that has long had links with the ruling party UMNO.

In the pre-crisis era, Renong did well, in part because it was given some of the government’s juicier privatization projects. However, when the crisis hit Renong and sister company UEM, they were hit hard by debt loads and a corporate governance debacle that left many foreign investors totally lost for words.

Since then, Renong’s stock has performed with all the dynamism of a body in suspended animation, while efforts have been made to restructure its debt. If Renong were a normal company it might have faded from the corporate firmament quite a long while ago. However, Renong is at the heart of Malaysia Inc, and is a component of the racial New Economic Policy that has sought to shift control of the economy from ethnic Chinese businesspeople to the indigenous Bumiputra (‘sons of the soil’) businessmen. Renong is run by Halim Saad, who is the most prominent member of the latter.

Last year a lifeline was thrown to Renong from the unlikely direction of Singapore. Singapore Telecom expressed an interest in the fibre optic network that Renong’s Time had built. It offered to buy into Time to the tune of M$2 billion to get access to this asset.

However, this soon became a political hot potato and aroused nationalist sentiment from UMNO – which is the Bumiputra party. Prime Minister Mahathir vetoed the plan and government investment arm Khazanah came in instead as a politically more palatable shareholder.

Listing Time

The only solution now was to list the fibre optic part of Time – which was injected into Time dotCom. Back when internet valuations were heading towards the stratosphere, this may have seemed a viable and clever way to use the equity markets to solve what was largely a debt problem.

However, once everyone started to question internet valuations in the second half of 2000, that strategy started to look more questionable. Indeed the pricing of the Time dotCom IPO may have flown in the heady days of dotcom euphoria, but in today’s market conditions investors instead looked at the fundamentals and examined their concerns about the Renong group.

The failure of this IPO is a sign that investors have little confidence in Renong. Indeed, having seen the way minority shareholders were so cavalierly treated by the company during the 1997 debacle with UEM, it is a wonder the company thought it could raise money through the equity markets again. The fact is, it hasn’t been able to.

And given Renong’s proximity to the Malaysian government, this is vote of no confidence by both domestic and foreign investors on certain aspects of government policy. It is also a salutary lesson for Tun Daim Zainuddin, the country’s brilliant strategist and finance minister. The lesson? You can persuade banks to lend, or to buy bonds, but not even the great Daim can persuade equity investors to act against their will and subscribe to a deal.

In point of fact, the hardest hit by the whole affair will be the underwriters, who fully underwrote the deal and are thus carrying 75% of the 571 million shares offered. It is thought the shares will gravitate to what analysts describe as the fair value level of M$1.50, a fall of well over 50% from the listing price.

Who will hurt the most?

The lead underwriter is Commerce International Merchant Bankers, which is controlled by Bumiputra-Commerce, a banking group which has Renong and the government as its major shareholders. Pain is thus being shifted from one part of Renong to another.

The other underwriters are Perwira Affin Merchant Bank and Affin-UOB Securities. The sub-underwriters are Amanah Merchant Bank, CIMB Securities, K&N Kenanga, Arab Malaysian Merchant Bank, HLG Securities, RHB Sakura Merchant Bankers and Utama Merchant Bank.