1MDB-PetroSaudi eyes stake in IJM

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The US$2.5 billion (RM8.54 billion) investment vehicle set up jointly by 1Malaysia Development Bhd (1MDB) and PetroSaudi International Ltd on Sept 30 is looking at acquiring a “strategic” stake in IJM Corp Bhd, sources say, adding that it will be the JV’s first “meaningful investment”.

According to sources, the JV may acquire the IJM stake from Zelan Bhd, which holds 82.33 million shares or an 8.77% stake in IJM as of June 30. The stake was valued at RM395.2 million, based on IJM’s share price that closed at RM4.80 last Friday.

It is not known whether the 1MDB-PetroSaudi JV will acquire more shares in IJM from other parties or on the open market.

But according to a source, the JV’s intention for the acquisition is to tap IJM’s construction expertise, which could be useful for some of the projects it plans to invest in, and not to take over the construction outfit.

As such, the result of such an acquisition is unlikely to lead to a general offer for IJM.

Armed with a US$2.5 billion (RM8.5 billion) war chest, the 1MDB-PetroSaudi JV was set up to invest in strategic high-impact projects in Malaysia and in the region. Of its total capital, US$1 billion will be injected by 1MDB, with the rest from PetroSaudi, an investment vehicle of the Kingdom of Saudi Arabia.

1MDB, formerly known as Terengganu Investment Authority Bhd, raised RM5 billion in May through the issuance of government-guaranteed bonds to local as well as foreign investors. Originally established as the sovereign wealth fund (SWF) of Terengganu, 1MDB’s role was subsequently expanded to be the country’s SWF, which is wholly owned by the federal government and is tasked with bringing in “matching foreign direct investment”.

Its JV with PetroSaudi to form an investment vehicle whereby both parties put in similar amounts of capital is proof of the matching FDI concept.

According to recent reports, the 1MDB-PetroSaudi JV is looking at investing in the petroleum-related industry, renewable energy sector and real estate. It is understood that some of the specific projects the JV is looking at putting its capital to use include the hydroelectric projects under the banner of Sarawak Corridor of Renewable Energy, and tourism-related real estate projects in Terengganu.

A source says such projects involve infrastructure construction and thus, it is only natural that the JV acquires a stake in IJM, which could participate in the civil works of these projects. Besides construction, IJM also has expertise in property development and the manufacture of building materials.

It is not the first time that interest has surfaced in the acquisition of a strategic stake in IJM, one of the few big construction players in the country and a proxy to domestic infrastructure development.

Earlier last year, talks surfaced that investors from the Middle East as well as local institutional funds, such as the Employees Provident Fund (EPF) — the major shareholder of IJM — were looking at merging IJM with Gamuda Bhd, another major construction firm. The idea was for the merged group to go in a big way into the Middle East, where infrastructure construction was booming at that time.

However, such plans did not see the light of day due to complications in sorting out management issues. Meanwhile, the ensuing global financial crisis, which halted some of the mega projects in the Middle East, eliminated the potential benefits of such plans.

Nevertheless, the EPF has since been increasing its stake in IJM, from 17.3% in the beginning of 2008 to 21.6% currently.

Given that it has strengthened its position in IJM as the single largest shareholder, it is unlikely that the EPF would want to divest its stake in IJM to 1MDB-PetroSaudi JV. This leaves Zelan, which holds an 8.77% stake in IJM, as the most likely seller.

Zelan, which is 39.25%-owned by Tan Sri Syed Mokhtar Al-Bukhary’s MMC Corp Bhd, has been trying to find a buyer for its stake in IJM to strengthen its capital base and beef up its core business in power-plant construction. In fact, the company has listed the IJM stake as an “available-for-sale investment” in its balance sheet. The disposal of its entire stake in IJM at the current price, at the very least, would raise nearly RM400 million.

For IJM, having the 1MDB-PetrolSaudi JV on board as a strategic investor, apart from EPF, would certainly boost its prospects in terms of participating in more infrastructure construction projects in the country as well as the region.

IJM’s stock price has risen 164% YTD to close at RM4.80 last Friday, riding on positive recommendations from analysts who believe the company is among the key beneficiaries of the government’s stimulus plans to boost the domestic economy.

This article appeared in Corporate page of The Edge Malaysia, Issue 779, Nov 2-8, 2009.