This article first appeared in The Edge Malaysia Weekly on April 24, 2017 - April 30, 2017

THE proposed merger between UMW Oil & Gas Corp Bhd (UMWOG), Icon Offshore Bhd and Orkim Sdn Bhd is understood to be facing difficulties, industry sources say.

While nothing is certain, oil price uncertainties could be giving these companies the  jitters. Their officials were not available for comment.

“What we hear is that the parties involved could be getting cold feet. Imagine creating such a giant oil and gas company when oil prices are still unstable,” says a source.

Another source admits there are troubles but says the companies still want to complete the deal.  “It’s never easy to conclude such a huge deal. There will always be issues, uncertainty, and it’s normal for doubts to creep in, but I think they (UMWOG, Icon and Orkim) are committed to see the deal through,” he says.

Yet another source says he has heard the deal is difficult to conclude, and that discussions between Permodalan Nasional Bhd (PNB) and Ekuiti Nasional Bhd (Ekuinas) — which controls Icon and Orkim — had hit a brick wall, but did not elaborate.

Icon is an offshore support vessel provider with 37 ships, while Orkim has 17 tankers that have an average age of six years. UMWOG, meanwhile, has eight offshore drilling rigs and five hydraulic workover units.

The notion that it is a difficult deal to conclude came after a second extension for completion of due diligence, announced last Wednesday by UMWOG. It had been slated for completion in early March. In mid-March, UMWOG said it was extending the period available to conduct due diligence on Icon and Orkim as well as the period available to conduct due diligence on UMWOG by Ekuinas to April 19.

On April 19, UMWOG extended the deadline to conduct due diligence on Icon and Orkim, as well as the period available for Ekuinas to conduct due diligence on UMWOG by a month to May 19.The cut-off date for the parties to fulfil, waive or complete conditions precedent was extended by an additional three months to July 19, 2017.

The delay should indicate something is wrong.

To recap, in January this year, UMWOG, a 55.7% unit of UMW, announced that it was looking to buy a 42.3% stake in Icon for RM248.88 million, to be paid in new UMWOG shares, and to acquire 95.5% equity interest in Orkim for RM472.7 million cash.

UMWOG would also make a mandatory takeover offer for the remaining Icon shares it does not own at 50 sen a share, payable in cash or new UMWOG shares valued at 80 sen each.

It is worth noting that PNB and its units under Amanah Raya control more than 57.74% of UMW, while UMWOG is 80%-controlled by PNB units, including UMW, which has a 55.7% stake.

The 42.3% stake in Icon and 95.5%  stake in Orkim UMWOG is acquiring are controlled by government private equity firm Ekuinas.

The merger was touted as a move by government-linked companies to create larger oil and gas companies capable of competing in the global arena.

The deal would involve UMWOG buying into an offshore support vessel (OSV) outfit and a product tanker operator — both ailing businesses — and issuing rights to recapitalise and fund the purchases.

When it was first announced, CIMB Research had said it was negative about the proposals as Icon and Orkim were priced much higher than UMWOG and the rights issue was termed “unnecessarily large and dilutive”.

“Yawning valuation gap does not favour UMWOG shareholders. These proposals have taken us by surprise because UMWOG has been suffering deep losses and is not in a position to acquire. The unfavourable valuation gap is also surprising. UMWOG plans to buy Ekuinas’ 42.3% stake in Icon at a price-to-book value of 0.82 times in exchange for new UMWOG shares valued at only 0.59 times.

“The subsequent mandatory general offer will offer Icon shareholders a choice of new UMWOG shares at the same low valuation or a cash payment.

“UMWOG also plans to buy Orkim at a price-to-book value of 3.56 times in an all-cash deal,” the research house said. It also highlighted that the global OSV utilisation rate was just 40%. “We struggle to justify UMWOG’s willingness to pay for Icon’s OSV assets.”

Oil and gas companies have been severely hit by tumbling oil prices. From a record high of US$145.29 a barrel in July 2008, the price dropped to decent levels of US$110.53 in September 2013. Oil prices then went into free fall, hitting a low of US$26 in mid-February last year. Last Friday, the international benchmark West Texas Intermediate was just above US$50 per barrel.

For its financial year ended December 2016, UMWOG suffered a net loss of RM1.19 billion on the back of RM320.81 million in revenue. The company ended trading at 64.5 sen, for a market capitalisation of RM1.39 billion.

Icon, for the 12 months ended December 2016, suffered a net loss of RM152.75 million on RM226.91 million in sales. Last Friday, Icon closed at 47 sen, giving the company a market capitalisation of RM553.28 million.

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