KUALA LUMPUR: Sime Darby Bhd plans to partly fund its RM5.6 billion acquisition of New Britain Palm Oil Ltd (NBPOL) — which is more than its cash hoard of RM4.9 billion as at June 30 this year — with proceeds from an initial public offering (IPO) exercise next year, according to president and group chief executive officer Tan Sri Mohd Bakke Salleh.

The IPO will most likely involve its automobile division, he added.

It was previously reported that the potential IPO was estimated to raise some US$500 million (RM1.62 billion).

Mohd Bakke said the group is looking to fund the buy with external borrowings (80%) and internally-generated funds (20%). The raising of funds via the IPO will help “manage” the group’s gearing level.

“Our gearing ratio is 38% as at June this year. With this acquisition, at least by the end of next [calendar] year, our gearing will probably move up to 55%. By then, we hope to be able to raise cash from our IPO and, at the same time, rationalise our capital expenditure … With these, our gearing should come down to 40%,” he noted.

He was speaking to reporters at the group’s media briefing yesterday on the general offer (GO) by its plantation arm — Sime Darby Plantation Sdn Bhd — to buy 100% of NPBOL shares at £7.15 (RM37.50) per share or £1.07 billion in total. The offer is conditional upon Sime Darby obtaining a minimum 51% acceptance of NBPOL shares.

As at June 30, Sime Darby’s total borrowings stood at RM11.17 billion against total equity of RM29.44 billion. Minus its cash balance of RM4.9 billion, it has a net gearing of about 21 times.

However, Sime Darby may not have to fork out the entire RM5.6 billion. It may just get up to 70% of NBPOL.

“I think they (the Papua New Guinea [PNG] government) will increase [their stake]. My ‘hunch’ tells me that they are looking at around 30%. That’s a good move because a partnership with the government bodes well for the business,” Mohd Bakke said.

As at June 30, Kulim Bhd owns 49% of NBPOL, the PNG government and other interests hold 22%, and institutional and retail investors have 24%, while the NBPOL management has the remaining 5%.

Sime Darby’s offer price represents a 30% premium to Kulim Bhd’s failed bid of £5.50 per share for 20% of NBPOL last year, as its independent board viewed the fair value of the company at between £6.50 and £7.00 per share.

Sime Darby deems its offer price, which is at an 85% premium to NBPOL’s last closing price on the London Stock Exchange (LSE) on Wednesday and a 55.7% premium to the volume weighted average closing price over the last 60 days, as fair.

“It may appear high but due to the illiquid nature of NBPOL’s shares on the LSE and the PNG Port Moresby Stock Exchange — with average trading volume representing less than 0.5% of the public float — the current price is not necessarily reflective of the company’s value,” said Mohd Bakke.

The offer price, which stood at the higher end of analysts’ estimates, values NBPOL at about RM84,000 on an enterprise value per ha.

Decreasing crude palm oil and palm kernel oil prices have dragged down NBPOL’s performance recently, with profit before tax dropping from US$275.5 million in financial year 2011 (FY11) to US$17.3 million in FY13.

Nonetheless, Mohd Bakke said, the buy, which should be completed by year-end, should gain Sime Darby earnings per share accretion of 4% to 5% in the next two years.

Sime Darby plans to delist NBPOL from the LSE and relist it on either Bursa Malaysia or the Singapore Exchange in the future.

“We intend to acquire both board and management control,” said Mohd Bakke.

Meanwhile, in an announcement to the local bourse yesterday evening, Kulim Bhd said it intends to accept Sime Darby Plantation’s offer, subject to its shareholders’ approval at an extraordinary general meeting to be called by the group, if it does not get any better offer for its shares in NBPOL.

If accepted, Kulim Bhd will be disposing of its entire stake in NBPOL, comprising some 73.48 million shares, for £525.40 million or RM2.75 billion.

This article first appeared in The Edge Financial Daily, on October 10, 2014.