Khazanah Nasional, the Malaysian government investment arm, agreed Monday to buy a 30% stake in TimedotCom, a unit of debt-laden Time Engineering Bhd for roughly M$2.2 billion ($579 million). The share sale means Time Engineering, which controls the biggest fibre-optic network in Malaysia, will be able to go to creditors tomorrow and present its debt plan on a firmer footing.
ôKhazanah will take up shares and bonds, and the proceeds will be used to pay back half of the M$4 billion in notes held by existing creditors,ö a banker familiar with the deal told FinanceAsia.com.
But itÆs bad news for Khazanah, which looks like it may be left high and dry with sizeable stakes in two Malaysian telecom companies. Khazanah has run into pricing difficulties over its proposed sale of a portion of its 36% stake in Telekom Malaysia Bhd to JapanÆs NTT, according to a source familiar with the negotiations.
Time Engineering û part of MalaysiaÆs debt-laden Renong group û has been in deep trouble with creditors for some time now, and has been under court protection since July 1998. KhazanahÆs investment is part of a three-pronged plan to help Time get rid of its crippling debts, which amount to roughly M$5 billion û an estimated quarter of the entire Renong groupÆs debts. (The Renong group is one of MalaysiaÆs biggest conglomerates and is politically tied to MalaysiaÆs dominant ruling party UMNO û United Malay National Organization.)
Stage 1: Debt restructuring
- Unsecured creditors offered new five-year loan stocks.
- Tenure and terms of $250 million bond to be adjusted.
- Secured creditors, which hold 80% of TimeÆs debt (holders of M$4 billion in promissory notes), will be repaid in full after TimedotComÆs IPO takes place in October.
- TimedotCom will also acquire assets from Time Engineering.
Stage 2: Sale to Khazanah
- Khazanah takes 20% in equity in TimedotCom for M$1.52 billion.
- Khazanah takes 10% stake in a secured exchange bond for M$606 million.
Stage 3: IPO process
- Sale of 25% stake in TimedotCom to investors and the public.
- Equity sale nets raises more than M$500 million for TimedotCom.
- Offer for sale raises M$1.5 billion for Time Engineering to pay off debts.
Stage one
Time Engineering will hope to kick off the first stage of its strategy - debt divestment - today, when it is scheduled to meet creditors. The company wants to replace its existing debts with new debts. It needs the bulk of secured creditors to replace their existing debt with promissory notes worth nearly $4 billion. These will be repaid in full after the IPO of its recently created entity TimedotCom, which is slated for October this year. Once it gets the creditors' approval, Time will sell the bulk of its telecom assets to TimedotCom. This will see TimedotComÆs share capital balloon to 2.53 billion shares. Bankers say the entire transaction is structured so that Time Engineering ends up with a 100% stake in TimedotCom.
Stage two
The second stage in the plan will now be able to get underway. Time Engineering will sell shares and a bond to Khazanah for a total of M$2.2 billion. The bond is convertible into shares over three years. Khazanah will make the full payment to Time Engineering just prior to TimedotComÆs initial share sale, according to documents provided by Time Engineering to the stock exchange yesterday. The public listing process will raise another M$2 billion.
Stage three
The third part of the plan, bankers say, is to sell another 25% of TimedotCom. Time Engineering will have 70% of TimedotCom at this stage, after selling 30% to Khazanah. TimedotCom will issue some shares to the public. Time Engineering will make a separate equity offering û an offer for sale û to investors. TimedotCom should raise roughly M$511 million, of which MalaysiaÆs securities regulator has mandated that 88% be spent on TimedotComÆs capital needs. Time Engineering will raise M$1.5 billion, through its equity offering, which will go towards settling the majority of TimeÆs notes held by creditors.
ôFollowing the restructuring, Time will be debt free and will find it easier to borrow. It can start investing again. Currently, its funds have been very limited,ö says Tjandra Kartika, analyst at GK Goh in Singapore, who has a speculative buy on Time Engineering.
TimeÆs creditors have been searching for a solution to the debt problem for a long time. Until lately, all TimeÆs plans to raise new financing have fallen flat. It rejected a proposal from Singapore Telecom (Singtel) in May, as the Malaysian government was not keen to have a company that is majority-owned by the Singapore government take control of a strategic asset. ThatÆs the reason why Khazanah Nasional was asked to step in. But the rescue has come at a price. Khazanah values TimedotCom at M$7.2 billion, compared with the M$8.3 billion price tag that Singapore Telecom had proposed to pay.
TimeÆs game plan
TimeÆs game plan for solving its debts comes after two years of near-paralysis. It struck upon the plan to list the bulk of its existing assets into the new entity, TimedotCom, after seeing the stratospheric valuations afforded to technology, media and telecom stocks (TMT) this year.
United Engineers Malaysia (another member of the Renong group) and Time Engineering both received a boost after MalaysiaÆs regulators lifted the chain-listing rules two weeks ago. Under the chain-listing rules, a subsidiary whose earnings comprised more than 50% of the listed company earnings could not be separately listed. UEM plans to list Plus, the toll operator for the North-South Highway that runs across the body of peninsular Malaysia, which contributes 70% of UEMÆs earnings. TimedotCom is a newly created unit that includes the best of Time EngineeringÆs assets, such as its 2,230-mile fibre-optic network.
Whether the lifting of the chain-listing rules is coincidental analysts are reluctant to hazard a guess. But it is apparent that in return for loosening these rules, Time Engineering has been set a stringent list of conditions that it must meet before the Securities Commission will approve a share sale of its unit. TimeÆs advisers said yesterday that the company would submit an appeal to the regulator on a number of these conditions.
Among these conditions: Time Engineering must draw up a concrete plan to fully redeem about M$3.99 billion two-year promissory notes and a contingency plan to fully redeem $250 million nominal value bonds. The details of the concrete plan and the contingency plan must be disclosed in the prospectus and circular to Time shareholders. The Securities Commission has also set terms on TimeÆs outstanding warrants.
Most importantly, ôTime must have a definite agreement with a strategic investor who will participate in the equity of TimedotCom before the issuance of the listing prospectus,ö according to company statements. And, if the investor does not have expertise in the telecoms business, Time will have to sign a technical agreement with a party for such expertise, who will add value to TimedotComÆs business. For all its money, Khazanah isnÆt considered a telecom expert.
Khazanah and Time Engineering have agreed to find a strategic partner within a year and that at least a 15% stake will be sold to the partner. The strategic partnerÆs shares will either come from new shares, KhazanahÆs portion or Time EngineeringÆs portion. While bankers say it means both sides will have to agree, analysts say it increases TimedotComÆs vulnerability to takeover.
ôIf you sell 25% to a strategic partner and 30% to Khazanah, thereÆs a chance it could happen. WeÆre assuming there will be more takeover attempts,ö says GK GohÆs Kartika, citing this as a reason why the stock is considered a speculative buy.
No NTT deal?
So far, it's a great deal for Time Engineering and a not-so-hot one for Khazanah. Khazanah has often invested in Malaysian companies û in troubled times and not. The problem with helping Time is Khazanah ends up with a stake in two Malaysian telecom firms, which it didnÆt want. And contrary to perception, Khazanah did aim to balance the books. When Khazanah was asked to step in to help Time Engineering in May, KhazanahÆs original plan was to sell shares in Telekom and fund its shares in Time, analysts say.
But NTT didn't play ball. Khazanah had been negotiating with NTT to sell a stake in MalaysiaÆs dominant telephone company for over six months. NTT finished the due diligence last December. Both parties were supposed to sign a memorandum of understanding on 30 June. But nothing happened.
ôKhazanah wants NTT to buy its shares at M$14 per Telekom share. NTT doesnÆt want to pay the price,ö said a source familiar with the negotiations.
Analysts say TelekomÆs fair value is closer to M$12 per share. Telekom has a market capitalization of M$40 billion at M$13 per share. NTT wonÆt say where it stands. ôWe cannot comment until we make a final decision whether or not to invest in Telekom Malaysia,ö a spokeswoman for NTT in Japan told FinanceAsia.com.
