Friday 29 Mar 2024
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KUALA LUMPUR (Aug 1): Shares of Tenaga Nasional Bhd (TNB) have fallen 3.6% since it announced its non-binding proposal in the middle of last month to acquire the remainder of 1Malaysia Development Bhd’s power assets – it closed at RM12.20 yesterday (July 31) – as bailout fears weigh on the stock, which has declined over 16% in the past six months.

These assets, five local and eight foreign power plants with a net generating capacity of 5,600MW spanning five countries, are housed under 1MDB’s power arm, Edra Energy Global Bhd.

So the crucial question now is this: Will TNB get a good deal from cash-strapped 1MDB? That is what the DigitalEdge Weekly (Aug 3-Aug 9) is seeking an answer to in its cover story titled ‘Power Consolidation’, especially as the value of 1MDB's power purchase agreements is depreciating fast as some are not that far from expiry, like the Telok Gong 1 Power Station.

The article explores how much will TNB pay for Edra’s assets, while keeping in mind the pros and cons of the acquisition and its potential, and weighing them against the RM18 billion - RM21 billion that 1MDB was hoping to value its power arm in terms of enterprise value, going by Edra’s draft prospectus for its now-defunct initial public offering.

1MDB-power-plants_DEW-1Aug2015

The weekly noted that if one were to judge from the deal in which TNB took over 1MDB's 70% stake in Project 3B, the national utility company appears to have demonstrated its ability to negotiate for a ‘fair price’. It paid RM47 million to take over the project to build a 2,000MW power plant in Jimah, Negeri Sembilan. It was also granted a tariff hike on the power plant.

But if one goes by TNB’s share price performance since it announced the latest shopping list, investors seem to lack confidence that it could pull off a good deal this time around, it said.

Then, there is the other side of the question - can the debt-ridden state investment fund, which is incurring multi-million ringgit interest expenses a day - afford to sell cheap?

Apart from having paid a hefty premium for its power assets - RM3.3 billion in goodwill, whereby goodwill on acquisition made up 28% of the total amount of RM12.05 billion it paid, it has also borrowed nearly RM18.2 billion to buy these same power assets – meaning that the state-owned investment fund cannot afford to offer any discounts, said the weekly.

1MDB may be hoping for RM18 billion-RM21 billion in terms of enterprise value, but industry executives estimate that the assets might only be worth around RM14 billion in these fire-sale circumstances.

Besides TNB, there are other local and foreign prospective buyers who are keen on 1MDB's power assets – including YTL Power International Bhd and Malakoff Corp Bhd according to sources – eager to snap them up cheaply because while Edra’s assets are in decent shape, there is simply too much debt weighing down its earnings.

It should be noted that TNB and 1MDB may be considered sister companies, given that Khazanah Nasional Bhd owns a 29.66% stake in TNB, and Khazanah is wholly owned by the Ministry of Finance, as is 1MDB. But Khazanah will be barred from voting on the proposal should an acquisition materialise. This means the next largest shareholder, the Employees Provident Fund (12.22% stake), will have a big say in the proposed transaction. Pie-chart-DEW-1Aug2015

The weekly also look at how the proposed acquisition, if realised, will boost TNB’s generation capacity by 3,112MV, giving it control of about 68% share of capacity in Peninsular Malaysia – and the possible repercussion to consumers should the utility giant fail to operate efficiently.

National security aside, the acquisition could well be a prelude to an initial public offering of TNB’s power generation assets — something that 1MDB wanted to do but was not able to, said the weekly.

But there is a high opportunity cost for TNB to acquire 1MDB’s power assets. The purchase of several power plants is expected to lift the utility’s net gearing to about 0.61 times from 0.45 times at present. TNB’s net debt currently stands at RM21.3 billion, including RM2.73 billion in cash, said the weekly.

This is in addition to the RM10 billion debt to its balance sheet that Project 3B, which TNB is taking over from 1MDB, will be adding, thus raising its net gearing to 0.8 times.

The cover story package also discusses why the Minister of Energy, Green Technology and Water Datuk Seri Maximus Johnity Ongkili will have a big say on the value of Edra, as 1MDB is now trying hard to retain Project 4B - worth an estimated RM1.7 billion to RM2.4 billion in equity value to Edra – after having to let go of Project 3B after failing to execute the project as it lacked the capital to do so.

The DigitalEdge Weekly is available on subscription. Get your digital copy now at subscribe.theedgemarkets.com to find out more. It can also be downloaded from Apple’s Newsstand and Androids’ Google Play.

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