MMC Corp to pay $2.6 billion for power-producer Malakoff

In potentially the largest acquistion ever undertaken in Malaysia, MMC Corp announced on Wednesday (May 17) that it will pay M$9.3 billion ($2.6 billion) to buy Malaysia's biggest independent power producer, Malakoff.

The investment holding company plans to also assume Malakoff's debt so that makes the cost of the deal roughly M$16.8 billion.

MMC’s proposed offer to shareholders represents a distribution of M$10.35 per share, a premium of 5.7% and 13.0% over the 5 day and 3 months weighted average price of Malakoff’s shares. This would value the company’s shares at 18 times 2005 earnings. A statement by MMC says that the acquisition is expected to complete by the first quarter of 2007.

In a classic leveraged-buyout, MMC proposes to acquire the power plants through its wholly-owned subsidiary Nucleus Avenue (M) Sdn Bhd, which will sell new shares, preferred securities and debt to fund the acquisition. New investors will also be invited to take up stakes in the special purpose vehicle but MMC will own a more than 50% stake in Nucleus Avenue upon completion of the acquisition.

According to MMC’s announcement Goldman Sachs has been appointed as international financial advisor to Nucleus Avenue while Commerce International Merchant Bankers and Newfields Advisors have been appointed as joint financial advisors to MMC for the corporate exercise.

MMC has investments in engineering and contracting, transportation and ports and utilities. Last year it earned 42% of its earnings from its 22% stake in Malakoff. Encik Feizal Ali, acting group chief executive of MMC says that "the proposed exercise is in line with MMC Group’s consolidation and transformation strategy to focus on three core businesses, namely, transport and logistics, energy and utilities and engineering and construction. This will also enable MMC to achieve its vision of becoming a premier utilities and infrastructure group."

Put more simply, a person close to the deal notes that this investment marks an effort by the company to "be more than an investment holding company and take more of an active ownership role."

But the exercise depends upon shareholder approval. UK-based International Power, which has one of the largest stakes with an 18% shareholding in Malakoff, says that it is receptive to this initiative by MMC. It said in a statement that this offer equates to approximately £250 million for International Power's shareholding, which would be substantially above its book value.

However, one Kuala Lumpur based analyst with an international bank says other shareholders might not want to sell. "They might be thinking that Malakoff has plans to grow, particularly with investments in the Middle East, so hang on, I don’t want to sell my shares just yet."

Similarly, Macquarie Securities analysts wrote in a May 17 report - that speculated on the deal before it was formally announced (and thus M$0.05 off the actual offer per share) - that: "We do not believe that an offer of M$10.30 per share would be sufficient to entice minority shareholders to give up their shares in Malakoff. We value Malakoff at M$11.00 per share based on a 12-month forward DCF valuation. As we move into the future and operating cashflows from Tanjung Bin are fully reflected, we see greater value in Malakoff."

The Macquarie analysts were referring to Malakoff's 2,100 megawatt Tanjung Bin Power Plant in the state of Johor, which is expected be fully operational by 2007. The coal-fired plant is expected to increase Malakoff's effective generation capacity from its current 3,130 megawatts to over 5,230 megawatts – that is equivalent to a 24% market share of Malaysia's installed capacity.

Malakoff also has stakes in five other power plants in Malaysia, including Kapar Power Station in Selangor state, the biggest single power plant in Malaysia. And together with other investors, it has also secured equity interest in the M$9 billion Shoaiba independent water and power project in Saudi Arabia.

MMC stock on the Malaysian exchange has jumped 92% this year. Malakoff shares have gained 20% in the same period, versus a more than the 7.4% increase in the benchmark Composite Index.