United Engineers Malaysia (UEM) is allegedly turning a blind eye to the best interests of its minority shareholders for the greater good of the Renong group once again. The company is planning to sell 25% to 35% of toll road operator Projek Lebuhraya Utara Selatan (PLUS) through an initial public offering (IPO) later this year for as much as M$4 billion ($1.05 billion), which would be the most money ever raised in a Malaysian listing.
Of the proceeds, M$3 billion is earmarked to pay down UEM's share of a M$8.4 billion seven-year bond, which was issued last year. This share is equivalent to the M$2.4 billion (plus interest costs) UEM spent acquiring a 31% stake in Renong in November 1997 at M$3.24 a share. The question is: why not sell the Renong shares, rather than sell PLUS into what can hardly be described as a strong market?
Renong executive chairman Tan Sri Halim Saad granted UEM a put option on this holding in early 1998. That gives UEM the right to sell its 722.9 million Renong shares to him at no less than its acquisition costs plus holding costs. This option, exercisable between 15 February 2000 and 14 February 2001 at 45 days' written notice, means UEM could get around M$4 per Renong share, against which the stock is trading at around M$2.
"In this sort of soggy market, I don't see Malaysian investors or foreign investors having the stomach for M$4 billion of a toll road company," says one analyst with a foreign brokerage. UEM shareholders took a hit when the company acquired the Renong stake and look like taking another one later this year. "It is a double whammy ... UEM has to excercise that put option or the minority shareholders suffer again," says the analyst.
If and when it lists, PLUS will have M$6 billion of project debt, of which M$2 billion is owed to the Malaysian government, M$1 billion to the Employees Provident Fund (EPF) and M$3 billion to banks. In addition, PLUS is directly responsible for M$1 billion of the M$8.4 billion seven-year bond, all of which is ultimately secured on PLUS' revenues. Although PLUS enjoys revenues of over M$1 billion a year and rising, creditors are unlikely to tolerate any dividend payments until the toll road operators' borrowings have been brought down significantly. The prospect of no or low dividends won't please potential shareholders and this would be reflected in PLUS' IPO pricing.
UEM plans to reduce PLUS' debt obligations before any listing by removing the PLUS guarantee on the seven-year bonds. For this to happen, UEM will require 75% bondholder approval, which should be forthcoming. The bondholders currently have to wait until 2006 before they will get their M$8.4 billion plus 9.4% a year interest back. If PLUS floats, they will immediately get M$3 billion back from UEM, although the remaining bonds would no longer enjoy the security of PLUS' toll road revenues on the outstanding Renong portion of this debt.
Renong plans to repay its share of the bonds via sales of its stakes in Prolink Development, Commerce-Asset Holding (CAH) - which controls Bumpiputra-Commerce Bank - and the proceeds from the exercise of warrants. These warrants are, however, convertible into Renong shares at M$2.65 a share and hence are out of the money for the time being, and the CAH stake is proving anything but easy to offload.