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http://www.feer.com/2001/0110_18/p085shroff.html

Pernas' Payback

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.

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.