1MDB buys Tanjong’s power assets

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KUALA LUMPUR: 1Malaysia Development Bhd (1MDB) is acquiring Tanjong Energy Holdings Sdn Bhd (TEHSB) from tycoon T Ananda Krishnan for RM8.5 billion as the state-controlled entity looks to strengthen its energy portfolio.

In a brief statement yesterday, 1MDB cited the investment as a “long-term strategic” one, adding  that it had signed a definitive agreement last Friday for the transaction, which is still subject to customary financing and regulatory approvals.

The announcement confirmed a report by The Edge that 1MDB was eyeing the power assets of Tanjong plc, which was privatised in late 2010.

“The acquisition signals the first step towards fulfilling 1MDB’s strategic intent to fulfil the country’s long-term energy security,” said 1MDB CEO Shahrol Halmi.

He noted that energy is one of the core focus areas for 1MDB, and that TEHSB is a prized acquisition.

“We are attracted to the strong operating track record of TEHSB, its well-diversified portfolio of quality assets, its strong in-house capabilities and the potential for new growth both here and abroad,” added Shahrol.

1MDB did not elaborate on how the price tag of RM8.5 billion was determined, but sources said the deal is to acquire the entire power assets of TEHSB, domestic and abroad.

Interestingly, in a circular to shareholders for the privatisation of Tanjong, its power assets in 2010 were valued higher at RM8.99 billion versus the purchase consideration of RM8.5 billion. The assets were valued even higher in 2009 at RM9.95 billion.

Tanjong’s power division posted an operating profit of RM1 billion in its financial year ended Jan 31, 2010 (FY10), accounting for 76.5% of the group’s overall operating profit, according to a circular to shareholders.

In FY10, Tanjong made a profit of RM748. 5 million on the back of RM3.9 billion in revenue. The circular was in relation to the privatisation of Tanjong by Tanjong Capital Sdn Bhd.

The total capacity of the power plants stood at 3,951MW. Tanjong wholly owns all its local plants namely Powertek, Panglima and Pahlawan as well as the Port Said and Suez Gulf plants in Egypt.

It has another three power plants in Bangladesh, one in Pakistan, two in Sri Lanka and one in Abu Dhabi.  

An analyst said the acquisition of Tanjong’s power asset would give recurring income to 1MDB, which has a debt obligation in form of a RM5 billion 30-year Islamic medium-term notes — the first ever long tenure Islamic instrument issued by a local entity.

It is worth noting that 1MDB made a net profit of RM544.34 million in FY11 ended March 31, up 28% from RM424.61 million the previous year, based on Companies Commission Malaysia data.

However, the profits came mainly from gains from the disposal of its US$2.5 billion joint venture with PetroSaudi to spearhead the flow of foreign direct investments from the Middle East and make strategic investments.

As at end March last year, 1MDB had over RM7.2 billion in liabilities and a share base of close to RM1 billion.

The question now is whether 1MDB will require a second round of financing for the purchase of Tanjong’s power assets.

It is understood that TEHSB’s local power assets’ power purchase agreements (PPA) are due for review in 2016. There are also concerns with regards to Tanjong’s operations in Egypt given the political turmoil there.

Nevertheless, Shahrol said given its unique private-public sector dynamics, 1MDB and TEHSB are in a strong position to create new synergies, establish global strategic partnerships and promote innovations in green and sustainable technologies.

1MDB added that it aims to further enhance the capacity of TEHSB as a “leading emerging market independent power producer”.

Goldman Sachs (M) Sdn Bhd has been roped in to act as financial advisor to 1MDB for this transaction.

Another windfall for Ananda?The disposal of Tanjong’s power assets came six months after Ananda sold numbers forecast operator Pan Malaysian Pools Sdn Bhd for reportedly RM2 billion to a group of Chinese businessman to help under-funded local vernacular and missionary schools.

Tanjong was taken private in September 2010 in a deal valuing the entire group at RM8.8 billion.

The sale of both assets would have raked in proceeds of RM10.5 billion for the billionaire businessman, resulting in a gain of at least RM1.7 billion, based on the RM8.8 billion valuation for the entire group in 2010.   

Ananda’s investment cost in the entity should be a lot less than the RM8.8 billion valuation as parties acting in concert already had 49.96% of the group in hand.

Tanjong still has at least three assets for sale: TGV Cinemas, the Tropical Islands resorts in Germany and a 67% stake in Menara Maxis, the freehold office tower next to the Petronas Twin Towers in Kuala Lumpur that houses the headquarters of Tanjong and Ananda’s flagship telecommunications player, Maxis Bhd.

KLCC Properties Holdings Bhd (KLCC Prop) owns the remaining 33% of Menara Maxis via Impian Klasik Sdn Bhd, according to KLCC Prop’s 2011 annual report. KLCC Prop is valuing the 49-storey building, with 805,644 sq ft of built-up space, at RM672 million which translates into RM834 per sq ft. Based on that, Tanjong’s 67% share would equal RM450.24 million.

It is noteworthy that Ananda did pay a decent premium to buy out Tanjong minorities. The RM21.80 apiece buyout offer was a 22% premium to the RM17.88 apiece Tanjong was fetching in the open market prior to the takeover announcement on July 30, 2010.

Similarly, both the RM4.30 offered to privatise Astro All Asia Networks plc in March 2010 and the RM15.60 apiece offered to privatise Maxis Communications Bhd in 2007 represented at least a 20% premium to the pre-announcement prices.

Measat Global Bhd, however, was privatised with a smaller premium to market price of about 11% in July 2010.

This article appeared in The Edge Financial Daily, March 8, 2012.