Tenaga has the edge in any bid for 1MDB power assets

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TENAGA Nasional Bhd will be the favourite to win in an open bid for the power assets held by 1Malaysia Development Bhd (1MDB).

With a market capitalisation of RM82 billion and cash of around RM12 billion, Tenaga has the financial muscle to buy Edra Global Energy Bhd, the company that owns all the power generation assets bought by 1MDB in 2012 for nearly RM12 billion.

It may also be politically acceptable for Tenaga, which is a public listed company but controlled by Khazanah Nasional Bhd, to take back a few of the independent power producers (IPPs), as the privatisation of power generation some 20 years ago has always been fodder for the Opposition parties to criticise the Barisan Nasional coalition that runs the federal government.

The key is whether any purchase by Tenaga will be done at fair value or at a hefty premium. If it is the latter, this will be seen as stepping in to help the debt-laden 1MDB.

The Edge Financial Daily broke the news last Thursday that 1MDB’s sole shareholder, the Ministry of Finance (MOF), had asked CIMB Investment Bank Bhd to look at an outright sale of Edra Global as an alternative to an initial public offering (IPO) on Bursa Malaysia, to raise cash to pare down some of the strategic investment fund’s massive debts of RM42 billion.

The listing exercise of Edra Global, which is handled by Maybank Investment Bank Bhd and AmInvestment Bank Bhd, ran into headwinds late last year because of the many controversies that have broken out over 1MDB’s poor cash flow and the difficulties it was having in servicing and paying off its borrowings.

The IPO was initially targeted for the third quarter of last year. It was then postponed to the following quarter, and is now slated for the middle of this year.

In the meantime, 1MDB’s cash woes have worsened, forcing it to eat humble pie by having to borrow RM2 billion from tycoon Ananda Krishnan in January to retire a debt and avoid a default. This month, the strategic investment fund received a RM950 million lifeline from MOF to pay interest to bondholders.

According to documents seen by The Edge, the IPO targeted an enterprise value of RM19 billion for Edra Global (RM4 billion equity value and RM15 billion debt). The company also has cash of around RM3 billion.

If the IPO, which is a combination of new share offers and sale of existing shares, takes place, and assuming there is a reasonable take-up, 1MDB would raise RM2.4 billion for itself but will see its equity interest in Edra Global cut to 20%.

Edra Global, on the other hand, would raise almost RM6 billion, half of which it would use to pare its RM15 billion debt.

An analysis of Edra Global’s financials show that an IPO would be challenging because investors would get a yield of 3.5% to 4%, which is low compared with other IPPs — YTL Power International Bhd, for instance, offers a yield of around 5%.

Edra Global’s yield is low because it overpaid by around RM3 billion for its power assets.

With the IPO going nowhere and market sentiment having turned cautious, plus the fact that Edra Global’s competitor, Malakoff Corp Bhd, will float ahead of it, MOF may not have a choice but to find another way to sell Edra Global and raise the badly needed cash.

Sources tell The Edge that CIMB will likely undertake a restricted tender exercise, meaning bids will be by invitation only.

Apart from Tenaga, other possible bidders are YTL Power, Malakoff, Petroliam Nasional Bhd and construction giants such as IJM Corp Bhd.

But Tenaga appears to be the strongest candidate.

In addition to having the financial muscle, buying Edra Global would be a strategic move as it will enable Tenaga to regain some of its past dominance in power generation. It will also enable it to take over Project 3B, the proposed 2,000mw plant that 1MDB was supposed to build but which has been delayed because of its financial woes.

If Tenaga wins the bid and assumes the net debt of RM12 billion (Edra Global has RM3 billion cash), the former’s gearing will rise from its current 28% to around 60%, which is palatable. Edra Global has an annual operating cash flow of RM1.6 billion, RM800 million of which is used to service its debt.

The question is how much will Tenaga pay for Edra Global? Will it be just RM2 billion? Or will it be RM4 billion or more?

The sum that it pays will determine if Tenaga uses this as an opportunity for it to do a strategic reconfiguration of the power sector in its favour, which would be positive for shareholders in the long run, even if it is done at a slight premium.

But if the premium is too steep, it will be tough for Tenaga to justify.

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This article first appeared in The Edge Malaysia Weekly, on March 23 - 29, 2015.