Friday 29 Mar 2024
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Until last Wednesday, it was uncertain that Khazanah Nasional Bhd would be a part of plans to restructure toll road concessionaire PLUS Expressways Bhd. But a flurry of high-profile meetings and the support of the Employees Provident Fund ensured that Khazanah kept control of its prized asset via UEM Group.

It was late evening when members of the Employees Provident Fund’s (EPF) investment panel gathered for an urgent meeting last Wednesay. At the top of the agenda was approving the takeover of PLUS Expressways Bhd.

What the panel had to deliberate was a document crafted by Khazanah Nasional Bhd and the EPF following discussions with officials of the Ministry of Finance (MoF) on the takeover.

This was not something that had come out of the blue. A corporate exercise involving PLUS had been an open secret for several months. It was only a question of when.

Still, the events that unfolded over the last two weeks — with a Tan Sri Syed Mokhtar Albukhary-powered MMC Corp lobbying strongly to take over UEM Group, the holding company of PLUS — almost derailed Khazanah’s plans for PLUS.

“It was touch and go … the situation was fluid until Prime Minister Datuk Seri Najib Razak gave the EPF and Khazanah his blessing over the weekend of Oct 9 to go ahead with their plan to take over PLUS,” says a banker. “The key player was the EPF and who it was comfortable working with. It chose Khazanah and UEM.” 

Last Monday, a team from Khazanah and another from the EPF, led by deputy chief executive Shahril Ridza Ridzuan, rolled up their sleeves to work out the structure of the plan.

“The next 72 hours were gruelling. The structure was changed several times until they decided to take the route of buying over the assets and liabilities. The entire deal was only firmed up on Wednesday night,” says the banker.

Trading in PLUS shares was suspended last Thursday and last Friday, at the unveiling of Budget 2011, Najib announced that there would be no toll rate hikes for PLUS highways over the next five years.

PLUS, meanwhile, announced that it had received an offer from UEM and the EPF to take over its assets and liabilities for a total of RM23 billion or RM4.60 per share.

MMC’s offer and that by Asas Serba Sdn Bhd had entailed a “no toll rate hike” for the rest of PLUS’ concession period.

“But since the SPV (special purpose vehicle) is also effectively owned by the government, there is nothing to stop a ‘no toll rate hike’ even after five years,” says the banker.

Whether or not the toll rates are raised after the next five years, the go-ahead from Najib was crucial for Khazanah.

If MMC had succeeded in taking over UEM, it would have spelt the end of Khazanah’s transformation team headed by Tan Sri Azman Mokhtar.

“At one stage, the odds were very much in favour of MMC. If that had happened, it would effectively have ended the tenure of Azman and his team at Khazanah because MMC is likely to play a central role in the development of Iskander Malaysia. Khazanah wouldn’t have had much of a role to play,” says an official familiar with the transaction.

Down the line
News that a corporate exercise involving the restructuring of PLUS was in the offing quickly spread after the Hari Raya holidays.

In fact, the EPF had already started working on its plan when Asas Serba and MMC came up with their proposals several months ago. The provident fund’s partner of choice was Khazanah.

The plan gained momentum on Oct 1, which was a Friday. At a meeting that day, Khazanah’s board members were told of the EPF’s “expression of interest” to work with it on the takeover or restructuring of PLUS.

“The EPF’s offer of about RM4.50 to RM4.60 valued PLUS at RM23 billion. It was prepared to give Khazanah equity and allow UEM to continue to run the highway,” says a source.

Coincidentally, MMC’s formal proposal to take over UEM and consequently PLUS reached MoF on the same day.

It is said that Asas Serba’s proposal to take over PLUS had also found its way to Khazanah that week, thanks to the lobbying of a former top leader.

The fact of the matter is, both MMC and Asas Serba had formal proposals then while the EPF had only an expression of interest because it had yet to get the green light from the prime minister.

Furthermore, until that Friday, it did not look like Khazanah would be in the driver’s seat, advising the prime minister on PLUS’ future. The merits of the different proposals were still being studied by a few top MoF officials.

“This got the top brass at Khazanah a little worried … by virtue of being the owners of PLUS, they wanted to have a say if a decision was being taken on its restructuring or disposal,” says a source.

“Meanwhile, Azlan (the EPF’s chief executive Tan Sri Azlan Zainol) and Shahril were treading carefully because the RM400 billion provident fund was a political hot potato,” says an official familiar with the deal.

Things were very tense for a week, say sources. Eventually, Khazanah and the MoF officials got the chance to brief the prime minister and he decided to give the Khazanah-EPF partnership the nod.

“The deciding factor for Khazanah and the EPF was that the provident fund was in dire need of high-yielding mature assets. If the fund was prepared to pump ₤1 billion into the UK to mop up cheap assets, why not take over PLUS in its own backyard? PLUS is a mature asset and provides high yields,” says a source.

“The EPF is looking at an IRR (internal rate of return) of 10%, which is much more than what it can generate from its investments in fixed income,” says a source. “Also, the prime minister was not keen to give the highway to listed or unlisted private entities as that would have been politically disastrous.”

Apart from the fact that PLUS is a high-yielding asset and that it is acceptable for the EPF to be involved in the takeover of the concessionaire, another point to note is that the biggest beneficiary of the exercise will be Khazanah and UEM, which control 55% of PLUS.

It will allow these entities to monetise some of their investments in PLUS.
The exercise will leave PLUS a cash-rich shell with RM23 billion that will be distributed to its shareholders — meaning half the amount will go to Khazanah and its wholly-owned subsidiary UEM.

Based on the federal government’s revenue estimates for 2009, it was supposed to have been paid dividends of RM2 billion by Khazanah but this did not happen because of the global financial crisis. But with the bounty from the sale of PLUS, Khazanah can probably afford to pay dividends in the coming year.

Not a solution for others
The sale of PLUS via the asset and liability method is a record of sorts as this is the first time a concession asset is being transacted in this way.

“The method involves approvals from the Economic Planning Unit (EPU) and bondholders as it means a change in ownership,” says a banker.

Be that as it may, it is easy to fathom why PLUS has to be taken off the capital markets. Its concession agreement has to be renegotiated to accommodate the new regime under which there will be no toll rate hikes over the next five years or more.

“The concession agreement has to be restructured and the debts refinanced to match cash flow with repayments. This is to facilitate the new regime where toll rate hikes every three years are no longer acceptable. If PLUS remains a listed entity, it will be difficult to renegotiate the terms of the concession agreement as the shareholders might  oppose it,” says a merchant banker familiar with the deal.

So, will the takeover structure of PLUS become the framework for other toll concessionaires whose toll rates have been deferred?

“That will not be the case. It is not a one-shoe-fits-all model,” says the banker. “Each concessionaire has a different set of shareholders and different funding structure. More importantly, not all toll concessions are as profitable as PLUS’. The EPF may not want to get involved in the less viable concessions.”

An official with a toll road concessionaire says the Malaysian Highway Authority (MHA) has been discussing with them possible solutions to restructure the debt and equity structure so that toll rate hikes are less frequent.

One that has been bandied about is for the EPF to take up the debt paper of toll road concessionaires at lower rates than those offered by the debt capital markets.

“The EPF’s cost of funds is low and it should be comfortable with returns of about 6% if the concession has steady traffic volume,” says the official.
The toll road concessionaires will then have to restructure their debts to change to a no-toll-rate-hike regime.

“This is possible but it depends on the concessionaires,” says the banker.

A lower cost of funds will also translate to better cash flow for the toll road concessionaires. For instance, if a concessionaire has debts of RM1 billion, a reduction of 1% in its funding cost will mean savings of RM10 million for the bottom line.

“The cost savings may look small but in terms of the amount collected, it would be large,” says the banker.

For example, SILK has debts of RM750 million at a cost of 8%. Its net operating cash flow is close to RM30 million a year. A 1% reduction in cost of funds will immediately increase its net operating cash flow by RM7.5 million or almost 25%.

Whether such a proposition takes off will depend on the concessionaire, traffic volume and the shareholders. More importantly, the government will only agree to such an arrangement if its problem is resolved — payment of compensation to concessionaires in lieu of delays in toll rate hikes.

Since the March 2008 general election, no concessionaire has been allowed to raise toll rates, and this is not likely to happen in the next few years.

In the final analysis, with the EPF hungry for high-yielding assets, a new regime is taking shape in the Malaysian highway industry. The restructuring of PLUS may not be the only one. There may be more, but certainly not in the same form.

This article appeared in Corporate, The Edge Malaysia, Issue 828, Oct 18-24, 2010 

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