Perodua in UMW's cross hairs

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KUALA LUMPUR: When UMW Holdings Bhd announced on March 9 it wants to buy a 50.7% controlling stake in MBM Resources Bhd at RM2.56 a share or RM501 million in all, the prize in UMW's cross hairs, to Corporate Malaysia, is obviously control of national carmaker Perusahaan Otomobil Kedua Sdn Bhd (Perodua).

UMW currently has a 38% stake in Perodua and has been its single largest shareholder since 1993. So, why is it making this move for MBM — and the additional Perodua stake — now?

UMW president and group CEO Badrul Feisal Abdul Rahim told The Edge Malaysia's assistant editor Khairie Hisyam Aliman in an exclusive interview that the merits of the proposed acquisition had been on UMW’s radar screen for some time but the group was focused on sorting out its oil and gas-related problems in the past two years. The interview appeared in The Edge's cover story, 'Perodua in UMW's cross hairs', for the week of March 19-March 25.

“Before you make any strategic move, you should actually put everything in order first,” said Badrul. And UMW is about done with that, he said.

Most notably, the group undertook a reconfiguration that involved the demerger of loss-making oil rig player UMW Oil & Gas Corp Bhd (UMWOG) from UMW last July. That, the weekly noted, eased some of the strain on UMW’s financial position as it had had to share some of UMWOG’s losses due to its 55.72% shareholding prior to the demerger.

Besides that, UMW had a slew of privately held oil and gas investments from which it sought to exit. At the moment, there are nine non-listed oil and gas businesses left to dispose of and all have been fully written down, Badrul said.

Badrul also clarified that Perodua is not the only goal in the proposed acquisition. He also sees MBM — which does motor trading and manufactures automotive parts — as a natural fit for UMW’s own core business.

"There are a lot of opportunities within the (bigger) group, provided that you're competitive. So you're killing two birds with one stone," he said.

The controlling stake in MBM is now held by Med-Bumikar Mara Sdn Bhd. The offer values MBM at RM1 billion, a 16.36% premium to its market value on the day the March 9 announcement came out. The offer price is also a 13.3% premium to MBM’s five-day volume-weighted average market price up to March 6.

If Med-Bumikar accepts the offer, UMW intends to privatise MBM by offering the same price to the other shareholders. MBM has a 22.58% equity interest in Perodua with another 10% held by UMW’s majority shareholder, Permodalan Nasional Bhd, via PNB Equity Resource Corp Sdn Bhd. UMW also separately offered RM417.5 million to buy PNB Equity Resource’s 10% stake. The remaining 29% or so in Perodua is held by Daihatsu Motor Corp as the technical partner.

Four days after announcing the offer, it said it planned to raise as much as RM1.1 billion to fund the proposed MBM takeover if Med-Bumikar accepted the offer.
 
Going by share price reaction, the market likes the idea of UMW taking majority control of Perodua. UMW’s stock rose 9.07% over two trading days after its offer to Med-Bumikar was announced on March 9. It closed at RM6.49 last Tuesday even though there was no certainty the offer would be accepted.

But the market isn't as happy with how the group wants to fund the proposed acquisition. A day after UMW announced the proposed cash call, its stock plunged 9.09%, wiping out the earlier gains. It had recovered somewhat by Friday (March 16), closing at RM6.31 for a net gain of 6.05% over five trading days.

In the interview, UMW president and group CEO Badrul Feisal Abdul Rahim conceded that the sharp drop was due to the announcement on the cash call. He also acknowledged that the group could have proceeded without asking shareholders to fund the proposed acquisition. After all, UMW's latest financial statement shows its net gearing stood at 0.38 times, while it has RM1.16 billion cash.

“Of course, we could have done that, but I think this (the cash call) is actually the best for the company,” said Badrul.

Market sentiment to the offer aside, much remains uncertain, The Edge wrote, as the offer was seen as unattractive to MBM shareholders. “UMW’s offer is also at a steep 30% discount to FY2017A book value of RM3.68 per share and in our estimates, it effectively values MBM’s 22.6% stake in Perodua at just eight times FY2019F earnings,” MIDF Research wrote in a March 12 report.

While Med-Bumikar may accept the deal due to scarcity of potential suitors, the same may not necessarily be the case for other MBM shareholders, the weekly noted. “We believe UMW will be hard-pressed to convince MBM’s minority shareholders to accept the offer, given the rather cheap valuation. Thus, we opine that the acquisition of MBM may not materialise,” TA Securities wrote in a March 12 note.

UMW, the weekly wrote, is aware of the street’s view of the offer price. But it is a “fair deal” for MBM’s shareholders, Badrul stressed.

What if the company rejects UMW's offer? Will there be room for UMW to raise its offer price? And how has UMW's principal Toyota and Perodua's partner Daihatsu reacted to the offer? Grab a copy of The Edge at good news stands near you today to find out about those, and more.

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