This article first appeared in Corporate, The Edge Malaysia Weekly, on April 18 - 24, 2016.

WHEN Berjaya Corp Bhd — the flagship company of Tan Sri Vincent Tan Chee Yioun — was actively divesting its holding in Berjaya Auto Bhd over the past few months, 10 senior management members of the automotive firm saw an opportunity for a buyout.

However, Berjaya Auto director Datuk Francis Lee Kok Chuan had not expected it to happen so soon.

“I was surprised that it happened so fast. We (the management of Berjaya Auto) had been talking about it, but it wasn’t a serious discussion and nothing was concrete. I had no idea that it would come out so soon,” he tells The Edge.

Berjaya Auto is a distributor of Mazda vehicles and spare parts in Malaysia and the Philippines. The company also assembles a selected range of car models at the plant of its 29%-owned associate, Inokom Corp Sdn Bhd, in Kulim, Kedah.

Lee says Berjaya Auto’s management had conceived the idea of a buyout after noticing that Berjaya Corp was offloading shares in the company. But the real discussion with the conglomerate only began last Monday.

“In the past, it had been just casual talk among ourselves (Berjaya Auto’s management). Nothing was discussed with Berjaya Corp. Some fund managers also suggested to us that we should consider a management buyout, since we are already running the company,” he recalls.

Last Tuesday, Berjaya Corp signed a memorandum of understanding (MoU) with certain key management members of Berjaya Auto. The MoU involves a proposed disposal-cum-injection of an aggregate of 31.88% equity interest in Berjaya Auto into a special purpose vehicle (SPV) at RM2.10 per share.

Berjaya Auto’s management, represented by its CEO Datuk Seri Ben Yeoh Choon San, will inject about 10% of the automaker’s shares into the SPV, in exchange for a 66.67% stake in the SPV (see chart).

Meanwhile, Berjaya Corp will dispose of its entire 21.88% equity interest in Berjaya Auto to the SPV, out of which a 5% stake will be satisfied by 33% shareholding in the SPV. Berjaya Corp will be paid RM406 million in cash for the remaining 16.88%, which will be raised by the SPV through borrowings.

Following the corporate exercise, Berjaya Corp will cease to be a direct shareholder of Berjaya Auto while the latter’s existing management members will emerge as controlling shareholders of the auto company.

Interestingly, Berjaya Auto may change its name after the management buyout as it will no longer be a major subsidiary of Berjaya Corp.

“We will cross that bridge when we come to it. Definitely, there will be a name change to better reflect the current set-up, but we don’t know what it will be yet,” says Lee.

Berjaya Corp had divested more than 12% of shares in Berjaya Auto since last December. This created a massive overhang on the stock, as investors wondered when the selldown would stop.

Berjaya Auto’s counter rebounded slightly after the MoU was announced, reaching an intraday high of RM2.31 last Thursday from a low of RM2.09 on Monday.

Lee says Berjaya Corp could have sold its stake to any party that wanted to control the automaker, but the management “doesn’t want to simply work for anybody”.

As they would effectively be gaining control of Berjaya Auto now, the company will be able to “work independently”, he adds. “The management can now concentrate on running the business professionally. We can control our own destiny.”

It is noteworthy that under the agreement, Berjaya Auto’s management and Berjaya Corp will be locked in together in the SPV for five years. Moving forward, the SPV is eyeing a new capital injection to reduce its debt, says Lee.

“We may issue SPV shares to some friendly parties. Subsequently, the stakes of Berjaya Auto’s management and Berjaya Corp in the SPV may be diluted. [The debt of] RM406 million is a big amount. At our age, we are scared of taking on so much debt,” the 56-year-old says, half in jest.

According to Lee, the “friendly parties” could be the dealers and vendors of Mazda vehicles, but nothing has been firmed up at the moment.

Berjaya Corp declined to comment when contacted by The Edge.

Speaking in a personal capacity, Lee says he is excited about the management buyout. “Personally, I have never done this before. All this while, I have been an employee. To me, there is no big change except that I now have a big borrowing,” he smiles.

On a serious note, Lee says he is glad that the 21.88% stake held by Berjaya Corp will not be sold to a party that the management is not familiar with.

“Obviously, we believe in this business. Otherwise, we won’t be using borrowed money to buy this block of shares. Now, for sure, we (Berjaya Auto) will have to pay decent dividends to pare down our (the SPV’s) debt. And if we pay out more dividends, it will be good for all shareholders,” he concludes.

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