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FEER: Pernas' Payback
By S. Jayasankaran
11/10/2001 1:45 pm Thu
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By S. Jayasankaran
Issue cover-dated October 18, 2001
Kuala Lumpur is set to nationalize another state-owned
conglomerate sold to private interests in 1996. This time, it's
debt-laden Pernas International Holdings, a listed concern
with interests in property, hotels and plantations.
Pernas' fate signals Prime Minister Mahathir Mohamad's
determination to catalyze the restructuring of Malaysia's
debt-ridden corporates. It also epitomizes the failure of
leveraged buyouts of state assets when those deals are
predicated on bullish equity prices. "They were getting into
hotels and property where there was a looming glut," says
Michael Greenall, the head of BNP-Paribas-Peregrine in
Kuala Lumpur. "And they came in at the top of the market."
(Pernas's share price has plunged 77% since the Asian
financial crisis to around 0.63 ringgit now).
On another level, it illustrates the government's desire to
institutionalize corporate shareholdings and management
rather than leave it to owner-entrepreneurs already
preoccupied with their own debt problems. It cuts both
ways. "We have had five years trying to resolve the issue,"
says a Pernas executive. "It will be a relief to let it go."
The story began in 1996 when Pernas acquired additional
hotels, land, buildings and stakes in seven listed
companies from its controlling-shareholder Perbadanan
Nasional, or PNS, a state agency set up to oversee Malay
economic advancement under the New Economic Policy,
an affirmative-action plan favouring ethnic Malays.
The price tag was 1.15 billion ringgit ($303 million), which
Pernas paid by cash and through a huge share issue.
Subsequently, Fernrite, a company comprising 14 Pernas
managers led by Pernas chairman Tengku Shahriman
Sulaiman, bought 32% of the enlarged Pernas from PNS for
495 million ringgit. PNS also sold 31% of the shares to
Malaysian institutional investors, 5% to employees and the
rest to minority shareholders. The deal, completed in
August, valued each Pernas share at 2.05 ringgit.
It was wholly in line with the dictates of affirmative action:
Privatization was seen as an ideal vehicle to create Malay
entrepreneurs and here, in an instant, were 11 of them.
Meanwhile, the market was booming and even analysts like
Greenall, then with another securities house, plugged the
stock in early 1997, saying it was valued at a discount to
its net asset value (estimated then at over 4.50 ringgit).
In late 1996 it received an offer from an Arab group of over
200 million ringgit for one of its hotels, The Istana, which it
rejected because it thought it could get a better price later.
But the Asian financial crisis put paid to such confidence,
with the stock plunging and analysts abandoning it in
droves. Meanwhile, the group was hit by debt both at group level
(almost 2 billion ringgit at its peak) and at shareholder level
(the 495 million ringgit owed by Fernrite). Asset sales were
sought to address the first problem but, given the crisis, it
was a buyer's market and could never be the solution.
Meanwhile, the group was hit by debt both at group level (almost 2 billion ringgit at its peak) and at shareholder level (the 495 million ringgit owed by Fernrite). Asset sales were sought to address the first problem but, given the crisis, it was a buyer's market and could never be the solution.
Fernrite was luckier for, strangely enough, it never actually
borrowed money. According to bankers familiar with the
deal, the company gave a bank guarantee to the
government in the first year and, after that, replaced it with
personal guarantees from each member, pledged against
Pernas shares. But with the collapse of its share price, the
government had no incentive to invoke the guarantees and
recover the money. So, the 495 million ringgit was
considered owing to the government.
Fernrite, however, managed to service the loan, paying
over 60 million ringgit to PNS in interest payments in total.
That was made possible by unusually high dividend
payouts: Such payments jumped threefold to over 60 million
ringgit in 1997 and 1998 before easing off to 48 million
ringgit in 2000. But they are clearly unsustainable.
The government has three reasons to step in. One, the
need to maintain Pernas's assets in Malay hands; two, the
need to alleviate group debt amid a looming global
slowdown; and three, Fernrite's inability to pay amid
prolonged market torpor. But the takeover will be
"amicable," according to the bankers. The state will simply
appropriate Fernrite's stake and Pernas' current
management will relinquish their board positions.
The bankers say, however, that Shahriman, an old
Mahathir ally, will be offered a 10% stake in Pernas. The
asking price, however, could be still 2.05 ringgit, over three
times the existing share price but reflective of Pernas's
underlying asset value (estimated at 2.86 ringgit currently).
"There will be no free lunch for anyone," says a
businessman close to the government.