Offers for PLUS – will Khazanah or govt bite?

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Offers for PLUS – will Khazanah or govt bite?

Postby admin » Thu Oct 07, 2010 2:04 am

IT’s not difficult to see why people have a desire to take control of one of the largest cash generating businesses in the country.

PLUS Expressways Bhd, which is controlled by Khazanah Nasional Bhd via its ownership of unlisted UEM Group Bhd, is now the subject of two unsolicited bids from the private sector.

The first was by privately held Asas Serba Sdn Bhd when it launched an audacious RM50bil proposal for PLUS and all the highways in the country.

Its main selling point was a reduction of toll rates and to cap toll rates until the end of the current concession period of the highways in the country.

That proposal generated a lot of buzz and questions but has not really generated traction with the owners of the highway assets.

Then comes a fresh proposal by MMC Corp Bhd, which intends to rope in the backing of two of the country’s largest funds, and has submitted another unsolicited bid for UEM Group.

By buying the UEM Group for a reported RM15.6bil, the MMC-led consortium would gain control of PLUS and again the trump card is reportedly its intention to not raise toll rates beyond the current level.

It is unsure if MMC is seeking an extension of the current concession period or if the funds would agree to the takeover of PLUS.

The tug-of-war for PLUS by Asas Serba and MMC now demonstrates that toll rates could be capped or reduced without an extension of the current concession agreement of the highways.

The question now is will Khazanah or the Government bite?

PLUS, which was originally controlled by United Engineers (Malaysia) Bhd, was the flagship privatisation project in the country.

The highway was always the crown jewel in the group which was controlled by Renong Bhd and in the aftermath of the Asian financial crisis, it was the highway and its cashflow that formed the backbone in the restructuring of the entire group.

Toll rate hikes even back then were a point of contention for the public but certainty were needed to push through the entire restructuring of Renong.

That was obtained after the Government gazetted the toll increases into law where PLUS would get a toll hike every three years.

That gave UEM, which was the vehicle that undertook the entire restructuring of Renong, the firm footing that allowed the restructuring to proceed as planned.

That certainty, encapsulated by firm toll increases and an extension of the concession period, has made PLUS more attractive as an investment.

It is no wonder then that Khazanah has to date resisted flipping one of its main cash makers.

But the outcry of toll hikes remains and generates a great amount of negativity from the public which is already burdened by the rising cost of living that for much of the time is above the increase of their own pay packets.

By capping or cutting toll charges, the savings would be transferred to road users but ownership of PLUS in Khazanah means Malaysians from all walks of life would indirectly gain.

The best way?

There is certainly political mileage to be grabbed if toll rates are capped or cut but is the offer from the private sector the best way to go about it?

MMC Corp has a large amount of debt but much of that is backed by cashflow from its subsidiary Malakoff. Analysts are uneasy over what the proposed takeover of UEM group would mean for MMC’s leverage and by capping revenue. Unless the new owners have a gameplan that could see more money coming in from non-toll sources, the best way to preserve margins would be to cut costs.

Nobody really knows the extent of fat there is in PLUS and while there is room for some cuts, I presume what road users would not want to compromise is on the safety and amenities that is currently offered by the current operator of the highway.

Another point to consider: will the Government continue with the tax waivers PLUS receives to cap toll rates should the highways be sold to the private sector? There are numerous variables that are unanswered at the moment.

One reason why bidders might be also comfortable with making the offer now is that a toll concession like PLUS tends to make more money as the tenure of the concession draws closer to an end.

In short, most of the money PLUS will earn is yet to come.

That got me thinking. With all the coverage over the proposed bids by the private sector to take control of PLUS, why doesn’t Khazanah through the UEM Group make the same promise? After all they are in the best position to afford it.

Being the original shareholder of PLUS, UEM would have the greatest amount of financial flexibility to trim toll charges or to meet the other proposals head-on and to cap toll charges like the other proposals.

Its cost of investment in PLUS would be lowest because the others would have to buy the asset at close to market value.

While there would be a hit in the share price, should toll rates be cut or capped, the financial viability of PLUS would not be compromised as Khazanah’s cost in the venture would be based on its original investment versus that of current market prices should any of the two private sector bidders succeed.

Higher initial costs and the debt servicing of the money needed to buy over those assets would also be a new risk element for bondholders and the government to consider.

Because the last thing anyone would want is a repeat of the nationalisation of a privatised asset once again. Maybe the best way around it would be to preserve what is there with a few changes.

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