This article first appeared in The Edge Malaysia Weekly on December 25, 2017 - December 31, 2017

CONVINCING a foreign investor to take up a strategic stake in Proton Holdings Bhd was a major challenge in itself. It also would not have been possible without a major restructuring that satisfied the interests of all major stakeholders.

Thus, taking into account the political nature of the transaction, the restructuring of Proton that paved the way for China’s Zhejiang Geely Holding Company Ltd to acquire a 49.99% stake has to be the best corporate restructuring of 2017.

While the deal is a merger and acquisition exercise at its core, it is the restructuring of Proton that enabled it to close, and so that becomes the focus.

DRB-Hicom was advised by boutique advisory firm QuantePhi, while Geely was advised by HSBC.

While Proton had some decent assets that became the key focus of the acquisition, it was a deeply-troubled company from a financial perspective. Keep in mind that when the deal took place, it booked a net loss of RM975.28 million for the financial year ended March 31, 2017. The year before, the car maker booked a loss of RM1.46 billion.

To make matters more complicated, Proton was also carrying almost RM963.67 million worth of debt at the time. This does not include the RM1.29 billion worth of redeemable convertible cumulative preference shares (RCCPS) that were issued to the government of Malaysia. Although they were classified as equity, they were in fact for a “soft loan” that carries a dividend rate of 4% on an cumulative basis.

On top of that, Proton also carried RM3.04 billion in payables — a key factor that had been putting stress on the company’s liquidity. The payables dwarfed the group’s combined inventories and receivables, which only comes to RM2.22 billion.

So what did the restructuring accomplish?

Broadly, the restructuring broke Proton Holdings into three main parts — the operational business, Lotus, and the bulk of Proton’s land bank, excluding the Tanjung Malim plant.

Off the bat, DRB-Hicom Bhd appears to have got a pretty good deal, particularly its minority shareholders. First, the Tan Sri Syed Mokhtar Al-Bukhary-controlled group managed to carve out Proton’s prized land bank for itself.

This includes the 250 acres of land in Shah Alam, where Proton’s main manufacturing plant is currently located. Geely was highly focused in its acquisition of Proton, and placed a high priority in consolidating Proton’s operations in the newer and more technologically advanced Tanjung Malim plant.

Geely had little reason to pick land as part of the deal, and rightly, left it to DRB-Hicom. While it will take a few years for the operations in Shah Alam to be relocated to Tanjung Malim, there is a lot potential value to be realised from redeveloping the land — about RM4 billion in gross development value.

The extraction of Lotus was particularly noteworthy as well, since it resulted in a fair deal to DRB-Hicom’s minorities. In total, Geely and Syed Mokhtar’s private vehicle, Etika Automotive Sdn Bhd, would fork out £100 million (RM556 million) in cash to be paid to DRB-Hicom.

If the deal had been structured less favourably for minority shareholders of DRB-Hicom, Syed Mokhtar might have extracted his 49% stake in Lotus without doling out the cash.

With the land and Lotus out of the way, all that remained were Proton’s core operating assets and corresponding liabilities.

In total, Geely paid RM460.3 million for Proton — RM170 million in cash and RM290 million in the form of technology transfer, that is, the rights to Geely’s Boyue SUV platform. This is still good for Proton, since it brought in cash. It is understood that the value of Geely’s Boyue platform was determined by independent advisers.

From Geely’s perspective, this allowed the group to monetise an existing asset it held — the technology and rights to Boyue. This minimised the need to inject cash into Proton, and at the same time, leveraged synergistic value creation to add long-term value to Proton.

Against this backdrop, the restructuring of UMW Oil & Gas Corp Bhd (UMW O&G) deserves a notable mention. It was the result of a failed merger exercise between UMW O&G, Icon Offshore Bhd and Orkim Sdn Bhd.

Maybank Investment Bank Bhd was the key adviser behind the restructuring of UMW O&G, which involved a demerger from UMW Holdings Bhd, a rights issue of RM1.8 billion to recapitalise the group, and lastly, a massive US$550 million debt refinancing exercise.

The refinancing exercise was jointly led by Affin Hwang Investment Bank Bhd and CIMB Islamic Bank Bhd.

The demerger allowed UMW O&G to become a direct subsidiary of Permodalan Nasional Bhd. Coupled with the rights issue, it set the stage for the largest debt refinancing exercise for the year. Note that the debt involves both revolving credit, trade facilities and term loans with tenures ranging from 5 to 10 years.

The new capital structure is expected to help the group weather the downturn in oil and gas until the cycle recovers.

Of course, the restructuring of Sime Darby Bhd is another notable mention. The group has since been split into three listed entities — Sime Darby Plantation Bhd, Sime Darby Property Bhd and Sime Darby Bhd.

This exercise is commendable for its size — RM48.2 billion — and the fact that it has unlocked lots of value by unwinding the group’s hefty conglomerate structure. However, the exercise was undercut by the fact that it also marked the failure of the Synergy Drive exercise that created the enlarged group in the first place after Sime Darby’s three-way merger with Golden Hope Plantations Bhd and Kumpulan Guthrie Bhd.

The demerger was dubbed the “Pure Play” strategy, and Maybank IB was the principal adviser.
 

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