The entry of PetroSaudi International (PSI) into UBG Bhd comes, coincidentally, at the same time as 1 Malaysia Development Bhd (1MDB) entering into an agreement with State Grid Corp of China (SGCC) to look into projects in the Sarawak Corridor of Renewable Energy (SCORE).

UBG and 1MDB are totally unrelated. The common thread is PSI, which also has a joint venture with 1MDB to look into oil and gas opportunities. The PSI-1MDB JV was firmed up in November last year with an initial capital of US$2.5 billion (RM8.35 billion), out of which US$1 billion will come from the Malaysian entity.

Putting PSI’s joint venture with 1MDB and its RM1.4 billion investment in UBG on the same plate, it is not hard to fathom why speculation rose that the Saudi Arabia-based private investment firm is probably looking for jobs in SCORE.

“If not, it will be hard for PSI to realise its investment in UBG. It must have an objective for spending RM1.4 billion,” says a merchant banker.

But a PSI official makes it clear that the JV with 1MDB and the venture in UBG are two separate transactions.

In an email reply to The Edge, the official says, “The move to acquire, privatise and de-list UBG is envisaged as a venture solely to be undertaken by PSI.”

The official says the reason for going into UBG is that PSI particularly likes the niche its subsidiaries, Putrajaya Perdana Bhd (PPB)and Loh & Loh Bhd, have carved out in the construction industry.

“We were presented with several attractive opportunities in Malaysia, but none had the strong options presented by UBG, namely upside in growth sectors of interest to PSI. UBG not only has interests in the construction sector, but a growing presence in oil and gas and utilities.
“We particularly like the fact that UBG’s subsidiaries — PPB and Loh & Loh — have a strong niche in their respective areas. In short, PSI believes that UBG is a good fit for our future plans in Malaysia and the Middle East,” says the official.

The official also says PSI’s plans to acquire UBG will not preclude it from looking at other potential acquisitions in Malaysia.

PSI, a privately owned oil exploration and production company with offices in Saudi Arabia, the UK and Switzerland, is owned by Tarek Essam Ahmad Obaid and private investors. Its ventures are mainly in oil and gas exploration and production and it has a substantial presence outside Saudi Arabia.

Considering PSI’s niche in the area of oil and gas its entry into UBG, which is essentially a construction company with small oil and gas interests, comes as a surprise.

Two weeks ago, PSI offered to buy out the interest of Majestic Masterpiece Sdn Bhd (MMSB) and Cahya Mata Sarawak Bhd in UBG at RM2.50 per share. PSI will fork out close to RM1.2 billion for a 89.8% stake in the company. Last Friday, PSI announced that it will take UBG and its two listed subsidiaries private, which will cost it RM1.4 billion.

UBG’s two main assets are its 80.83% interest in Loh & Loh and its 85.85% stake in PPB. UBG acquired both companies at hefty valuations in 2008 in a complex restructuring exercise.

UBG funded the acquisitions from the proceeds of its disposals of a 32% stake in Rashid Hussain Bhd (RHB). After returning RM1.37 billion to its shareholders and settling debts of RM145 million, UBG was left with RM821.7 million in its coffers as at Dec 31, 2007.

However, UBG did not have any core business, which resulted in the entry of MMSB as a controlling shareholder with close to 53%. CMS had 37.21% post the restructuring of UBG. 

The entry of MMSB came together with UBG acquiring a 48.5% stake in PPB and 37.6% in Loh & Loh. The deals were all announced in January 2008, and the acquisitions were pricey.

PPB was injected at a price-earnings (PER) multiple of 16.6 times its 2007 earnings, while Loh & Loh was acquired at 20 times its price earnings multiple. Both companies were substantially controlled by Abu Dhabi – Kuwait- Malaysia Investment Corp (ADKM), which also owns MMSB.

The exercise proved costly for UBG, as it had to undertake a mandatory general offer (MGO) for shares it did not own in both PPB and Loh & Loh, as the block of shares it acquired exceeded the 33% mark. UBG ended up with less than RM250 million in cash after having to fund the MGOs which received large acceptance.

The shareholders of MMSB, which is controlled by ADKM, include Abu Dhabi’s ADIA Investment Co, KIA Investment Co of Kuwait, members of the Terengganu royal family and Jho Low, a well-connected, young corporate figure.

The members of the Terengganu royal family include Tengku Rahimah Mahmud and Tengku Ahmad Faisal Tengku Ibrahim. Low was an adviser to the royals and a key person in the formation of the Terengganu Investment Authority (TIA) — a Terengganu state initiative that did not take off. The federal government used the RM5 billion that was raised to set up 1MDB.

Coming back to UBG, helmed by MMSB it failed to secure the large construction projects it needed to extract value from the pricey assets it had acquired. ADKM was banking on the Arab investments in IDR to land it some big jobs, but they never came.

It finally sold out at RM2.50 per share, the same price it paid for its stake in the company in 2008. Although the price was the same, ADKM probably would have benefited to some extent from the injection of Loh & Loh and PBB into UBG in 2008.

As for PSI, it is left to be seen if the fund is able to extract value from its investments in UBG, which the well-connected ADKM failed at.

PSI denies it is in UBG only for the short term and says its investment strategy is to move into growth sectors in the energy, utilities and construction sectors.

“Investments in these sectors have a long gestation period. Therefore, our interest in UBG or Malaysia is not short term. We see ourselves being here for the long haul,” says the official, adding that the reason they are buying into UBG is that their expertise in the construction sector is limited.

“That is precisely why we are looking at acquiring or buying into well run professional companies. PPB and Loh & Loh fit this bill perfectly. Acquiring UBG will give us immediate access to the expertise of both these companies,” the official says.

By acquiring UBG, PSI will acquire this expertise. But more importantly, it needs to get jobs to extract value from its investments. Otherwise, it will find itself paying a heavy price later.

PSI’s venture with 1MDB and UBG may be two separate transactions. But with few construction jobs to go around outside Sarawak in the next few years, it will be hard for PSI to recoup its investments if it does not land some work in SCORE.

Why PSI is investing in UBG
Below are PetroSaudi International's email answers to questions by The Edge

The Edge: Why is PetroSaudi investing in UBG? What is it in UBG that PetroSaudi finds attractive?
Answer: PetroSaudi International has been on the lookout for opportunities in the region as part of our strategy to move into growth sectors and widen our portfolio. We were presented with several attractive opportunities in Malaysia but none had the strong options presented by UBG, namely upside in growth sectors of interest to PSI.

UBG not only has interests in the construction sector, but a growing presence in oil and gas and utilities. We particularly like the fact that UBG's subsidiaries - Putrajaya Perdana and Loh & Loh - have a strong niche in their respective areas. In short, PSI believes that UBG is a good fit for our future plans in Malaysia and the Middle East. It is worthy to note that our plans to acquire UBG will not preclude PSI from looking at other potential acquisitions in Malaysia.

The speculation is that PetroSaudi is only looking at holding the stake for a short period? Your comments please.
The investment strategy of PSI involves moving into growth sectors and making acquisitions or entering into partnerships in promising regions in the energy, utilities and construction sectors. Investments in these sectors have a long gestation period. Therefore, our interest in UBG or Malaysia is not short term. We see ourselves being here for the long haul.

What expertise does PetroSaudi have in running a construction outfit?
PSI's expertise in the construction sector is limited. That is precisely why we are looking at acquiring or buying into well run professional companies. Putrajay Perdana and Loh & Loh fit this bill perfectly. Acquiring UBG will give us immediate access to the exertise of both these companies.

Would UBG be eventually absorbed into the joint venture company established between PetroSaudi and 1 Malaysia Development Bhd?
The move to acquire, privatise and de-list UBG is envisaged as a venture solely to be undertaken by PSI.

This article appeared in Corporate page, The Edge Malaysia, Issue 789, Jan 18-24, 2010