A long time ago – 1987 to 1992 – as one of the handful bunch of managers at United Engineers Berhad – I was involved in acquiring 10,000 acres of land in Johore for what was then known as The South West Johor Development Corridor.

As a matter of fact, my own signature was scrawled across many forms at the district land office.

Today the story is a changed one – although the underlying asset is much the same: LAND.

Here is a longish note from a Banker, who prefers anonymity. 😃

” Why is Khazanah using taxpayers money to help a problematic privately-owned property company?

UEM Berhad, a company owned by Khazanah, recently announced a proposition to merge its property arm, UEM Sunrise, with another property company, Eco World Development Berhad. It was claimed that it will create the largest property company in Malaysia and hailed as a brilliant business move.

But, as we know, the devil is in the details for any merger. When we look at the details, this deal
smells like a bailout.

First, the rakyat will lose control of the company. It will now be run by Ecoworld.

Let’s look at the shareholders of UEM Sunrise pre-merger. Khazanah owns 66%, Urusharta Jamaah (indirect for Tabung Haji) owns 7%, EPF owns 4.6%, which means rakyat owns 77.7% of UEM Sunrise.

It’s a deal that involves a big chunk of rakyat’s money. Therefore, from the announcement, we can highlight some areas of concern that the Rakyat should know about, because ultimately it is your money, your savings, your pension fund that is making this acquisition.

Let’s look at the main areas of concern:

Post-merger, Khazanah (a.k.a. the rakyat) is no longer the majority shareholder. After the merger with Eco World, the shareholding will drop to about 43%. Khazanah will lose majority control. Why would anyone want to give up control of a large property asset? Will they get cash from Ecoworld? No, instead, Khazanah will absorb the debt of Ecoworld.

After the merger, Urusharta Jamaah (a.k.a.Tabung Haji) shareholding in UEM Sunrise will also be diluted down from 7% to 3.9%. Tabung Haji shareholders should be asking the same question. What am I getting for having less of a stake in the original property company? Is the new entity a good asset company? The answer is no.

Who then will be the biggest shareholders after Khazanah? It is the owners of EcoWorld. From having zero stake in UEM Sunrise, the shareholder of EcoWorld will have about 24% of the combined entity.

Specifically, Sinarmas Harta Sdn Bhd now becomes the second-largest shareholder with 12.6% stake. Now, who is Sinarmas Harta Sdn Bhd? Sinarmas Harta is the wholly owned subsidiary of Syabas Tropikal Sdn Bhd which is 99.99% owned by Tan Sri Leong Kok Wah, Eco World’s Non-Independent (so he is linked) Non-Executive deputy Chairman.

Then we have four other shareholders. Tan Sri Liew Kee Sin (3.6%), Eco World Development Sdn Bhd (3.4%), Liew Tian Xiong who is Liew’s son (2.8%) and Jernih Padu Sdn Bhd (1.9%). Together they make the Eco World group, who is now the second largest shareholder at 23.9% of the new UEM.

In the announcement, there is also an employees stock options (ESOS) of 5% from this new merged entity. Rakyat, please ask who is entitled to this 5% ESOS and how is it rewarded to the person or persons? And, we don’t know the ESOS pricing yet. And there are no KPIs linked to the award of ESOS.Rakyat, you need to watch this space.

Thus, the shareholding raises many questions as to why Khazanah would dilute its ownership to below majority. What was the incentive to lose control? Most owners will tell you that the last thing they will do is to reduce their ownership below 50% unless they are looking to realize value and begin to exit. However, given the market conditions and looking at the deal, it appears that Khazanah is not walking away with any cash in hand, but instead it has lost control of a large property company.

We have been told that the people who will run the enlarged firm will be the owners of EcoWorld. So the rakyat not only loses the majority ownership of UEM Sunrise, they will no longer have control.

On top of that, it is their money that will be used to bail out a distressed company like EcoWorld. EcoWorld has a huge debt. When you evaluate a property company, you must look at their gearing or debt. When you buy a property, you must assess if the developer is strong enough to deliver the property to you. No point in paying a down payment and then the property developer goes bust. The Rakyat are not so clueless not as to know that EcoWorld has bought into their landbank at expensive valuations. This means margins will be thin.

At the end of FY2019, the Eco World gearing ratio was at 70%. What does that mean? If you earn RM100, RM70 must be paid to someone else for the loan that you took. The Rakyat may ask now why would Khazanah lose control of its subsidiary and at the same time incur more debt?

The total debt of EcoWorld is about RM3.6 billion, which will now be the responsibility of the rakyat. EcoWorld has a remaining 4.6k acres compared to UEMS of 12.3k acres. UEMS has a much cheaper landbank than EcoWorld.

So why would a property company with lower borrowings and access to cheaper land sell out its majority, merge with a company that has a smaller landbank and higher borrowings, and then allow them to take charge?

Then there is systemic risk for the lenders backing the two firms – CIMB, whose major shareholder is Khazanah, is the main banker for UEM Sunrise. Meanwhile Maybank, whose majority shareholder is PNB, is the main banker for EcoWorld. By having two government-owned banks give credit to this single large group that are heavily indebted could expose the banking system. This could lead to further bailouts.

So whilst EcoWorld’s owners, Liew in particular, will get extended credit lines to leverage further. Don’t be surprised to see institutional backers like EPF, PNB, or ASN become the new buyers to support the share price of this bailout merger.

And whose money is in EPF, PNB, ASN? The Rakyat!

Third point: What is so strategic about investing in a high-end property company? Rakyat, please know that the property market is going to be very challenging going forward. What benefit would this merger give to the Rakyat and this nation? Would this merge create employment? Unlikely.

Instead it would most probably cut jobs, a common thing with huge mergers. So why waste the rakyat’s money on a non-strategic move?

Some analysts call this a merger for survival. Really? Survival for who? Judging from the deal, it’s survival only for EcoWorld. Please don’t forget what he did to poor Malays who put money in PNB (via ASN). PNB bought SP Setia from Liew, who then took over a shell entity called Focal Aims Berhad (later changed to EcoWorld), got his son go in and run it, then slowly poached the management of SP Setia and payrolled them under EcoWorld, which is basically a rebranded SP Setia.

And this was done despite having agreed to help SP Setia make money for PNB as part of the deal between the PNB and SP Setia.

Now PNB is saddled with debt and a RM3 billion impairment (difference between purchase price and current market value). Seems like the same thing is happening here. Don’t forget PNB paid RM3.95 per share for SP Setia when they bought it from Liew, and the share price of SP Setia is now RM 0.75 cents. PNB and millions of its Bumi unit trust holders are the losers, Liew and his family are the winners.

Rakyat, please do not be fooled when you are told that this is a good deal. As we have shown above, this is a lopsided and thieving deal. Rakyat is suffering enough. Is Khazanah punishing the rakyat and rewarding private developers?

As of now, the basis for this merger makes little to no sense at all. Choosing EcoWorld to merge UEM Sunrise raises more questions than answers. We all know that UEM had a poor deal with Sunrise, and now yet again with Eco World.

I don’t know about you, but I can definitely see a pattern here on how to bail out highly geared owners using the Rakyat’s money.

We need to put a stop to this nonsense.”

 

END.

Posted as forwarded to me.

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