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| Posted: 15 Jul 2011 05:55 PM PDT A QUIETLY put together deal, the proposed merger of local oil and gas service providers SapuraCrest Petroleum Bhd and Kencana Petroleum Bhd announced earlier this week has taken many by surprise. Dubbed a "merger of equals", sources say the deal was done by way of a merger as opposed to one acquiring another so as to send out the right signal to the market. "In the case of an acquisition, one will be known as the acquirer and the other an acquiree. This message trickles down to the staff and will impact the overall morale. But this deal signals the merger of true equals," sources close to the deal tell StarBizWeek. Analysts and industry players say the timing for the merger is right given the Government's emphasis on the growth of the oil and gas sector as a national key economic area. With a friendship exceeding three decades, Sapura Group president and chief executive officer Datuk Shahril Shamsuddin and Kencana's chief executive officer Datuk Mokhzani Mahathir are viewed as the most likely candidates to head the merger, driven by a consolidation in oil and gas (O&G) service providers. But still the biggest challenge is making the merger work. The offer Once SapuraCrest and Kencana merge, the new entity will become the country's largest O&G service provider by asset size at RM6bil and second by market capitalisation at RM10.88bil. "This not only gives the financial muscle for the new entity to undertake larger and more complex projects in future, but the merged entity will have economies of scale," says a source close to the deal. The proposed merger, valued at RM11.85bil, will see special-purpose vehicle Integral Key Sdn Bhd (IKSB) buy up the assets, liabilities and business undertakings of both companies, to be paid in cash and new shares in IKSB. Mayban Ventures Sdn Bhd owns the SPV and the latter will be jointly advised on the corporate deal by Maybank Investment Bank Bhd and CIMB Investment Bank Bhd. Although the name of the new merged entity has yet to be disclosed, sources indicate that it will likely be known as Sapura Kencana Petroleum Bhd. CIMB Group deputy chief executive officer Datuk Charon Mokhzani told a media briefing on Monday that the SapuraCrest-Kencana merger using an SPV was akin to that of Synergy Drive Sdn Bhd's buyout offer in 2006. That Synergy Drive deal saw several plantation companies held by major shareholder Permodalan Nasional Bhd merge to create the world's largest publicly-traded oil palm company, now known as Sime Darby Bhd. The overall offer price for SapuraCrest is RM5.87bil, which works out to RM4.60 per share. The company will receive 15% of the offer price in cash, or some RM875mil, while the balance will be in new IKSB shares. Meanwhile, the offer price for Kencana was some RM5.98bil, or RM3 per share. Its cash payment amounts to 16.2% of the offer price, or RM969mil, and the balance will be satisfied with new IKSB shares. "The new shares and cash portion at a ratio of 85:15 respectively is being used to sweeten the deal for all shareholders," Maybank Investment Bank Bhd chief executive offer Tengku Datuk Zafrul Tengku Abdul Aziz says. However, sources say the cash portion is to ensure that all shareholders view the merger as a good deal and will help incentivise other major shareholders in voting the deal through. Shareholders' approval amounting to 75% on both sides will be needed for the deal to proceed. With both Shahril and Mokhzani on board for the merger, a key shareholder of Sapura is Norway-based Seadrill Ltd with a 23.6% stake while Kencana has Kumpulan Persaraan Wang with a 6.8% stake in it. Both Sapura and Kencana have a common shareholder the Employees Provident Fund (EPF) with a 10.1% stake and 7.8% stake respectively in the companies. While the board is currently mulling over the deal and will decide on whether to approve the deal and bring it to vote by shareholders, sources say Seadrill is keen for the merger to happen as it will have a stake in an integrated O&G service provider that will derive earnings from both the domestic and international markets. Market talk is rife that the SapuraCrest-Kencana merger was truly the brainchild of Shahril and Mokhzani, with both chiefs having secretly toiled away on getting this merger off the ground for several months. However, they are said to be forced to stay behind the scenes due to the highly sensitive nature of this deal involving several key shareholders. Both chiefs were not present at the media briefing on Monday and have declined to comment on the deal, pending their respective boards' decision. The investment bankers have taken a lead on this deal and are seen as the forefront speakers of the deal. Market observers say that Maybank's involvement is through its ties with Mokhzani, with the bank's more recent engagement with Kencana being its private placement, while CIMB was brought in through its dealing with Shahril's SapuraCrest. While that may be, sources say the investment vehicles of Shahril and Mokhzani (Sapura Technology Bhd and Khasera Baru Sdn Bhd respectively) have an agreement in which their shareholding structure would not differ more than three to four per cent in the new merged entity. Based on the proposed merger, the shareholding difference between Sapura Technology and Khasera Baru is 3.8% (refer to shareholding structure chart). Of the new IKSB shares being issued, SapuraCrest will get some 2.499 billion new shares in IKSB at an issue price of RM2 while Kencana will receive 2.505 billion new shares. The deal is expected to be concluded within a six- to eight-month timeframe, with both companies to be de-listed upon completion of the exercise. The new entity will subsequently be listed, taking on the listing status of either SapuraCrest or Kencana. While the offer is valid until August 15, sources says the boards of directors of both companies may revert as quickly as next week with an answer. Concerns on the deal? A main concern among the analyst fraternity is who will lead the new merged entity -Shahril or Mokhzani. "The key concern now is not the deal's merits but who will take the lead as there are staff on both sides and they would want their respective chiefs to head the new merged entity. You can't have two CEOs for day-to-day running and deciding on strategy," says a market observer. While the proposed deal calls for a merger integration committee to be set up upon the offer acceptance by the boards, both Shahril and Mokhzani will co-chair the committee on its pre-merger governance and help accelerate integration after the merger. Although there are indications that both Shahril and Mokhzani will likely steer the new entity together as joint-CEOs, it is a foregone conclusion that one will eventually take a back seat but still maintain a role in the company's overall operations. Mergers being aborted as the parties involved are unable to agree on management control of the new merged entity is a valid concern, as seen with property companies IJM Land Bhd and Malaysian Resources Corp Bhd aborting their proposal to merge last December. However, integration of both O&G companies may prove slightly easier as both are technical-oriented companies, say market observers. While analysts say the offer price for both companies are acceptable, the respective boards will now be tasked to ensure that shareholders have received an attractive offer. Thus, Kencana has appointed AmInvestment Bank Bhd as its adviser and Credit Suisse as its financial adviser for the offer while SapuraCrest has appointed RHB Investment Bank Bhd as its main adviser and is in the midst of considering either Goldman Sachs or Morgan Stanley. "Directors of both companies need to have their own advisers so that they can advice the boards accordingly on the valuation of the deal and if the pricing is attractive," says a local research oil and gas analyst. Tengku Zafrul says that the valuation was derived from market consensus of analysts' reports based on next year's forecasted numbers and at price earnings ratio of 18 times calendar year 2012. Based on Bloomberg data, SapuraCrest is currently trading at a PE of 22.64 times while Kencana is trading at 25.21 times. Sources close to the deal say since the deal can take-up to eight months, it is difficult to rule out the possibility of a revaluation of the deal should either companies win large contracts or make provisions in the coming months. Another concern highlighted by analysts includes the new merged entity having RM1.84bil added to its books as borrowings as a result of the cash payment made to shareholders of both companies. The new merged entity will borrow this sum from its investment bankers to pay shareholders, which results in the present net cash position of both companies reversing to a net debt of RM1.62bil post merger. Analysts did say that the overall borrowings of the merged entity will be manageable with its net debt to earnings before interest, taxes, depreciation and amortisation ratio of two times and a net gearing ratio of 0.2 times as O&G service providers tend to have high gearing due to the capital intensive nature of the sector. Aside from this, the market is also abuzz that some sub-contractors may feel threatened that their livelihood is at risk with the proposed merger. "Now that both SapuraCrest and Kencana will become an integrated O&G service provider, some sub-contractors may feel threatened that they will not be needed under the merger," says a source, adding that the merged entity will likely undertake a streamlining if its sub-contractors. Come together, right now The merger is aimed at creating a full-fledged O&G service provider with strong delivery capabilities across the value chain. The financial strength will also help support growth opportunities and act as a platform to strengthen presence globally. Sources close to the company said that the gameplan was for the merged entity to derive some 50% of revenue in time to come from overseas jobs from some 15% currently. Both players do operate in international waters presently, with SapuraCrest operating in Brunei and Indonesia while Kencana is in India and Australia. "We believe that the proposed merger is timely in light of the investment cycle in the O&G sector, especially upstream activities," Tengku Zafrul says. "Larger projects with increasing complexity are being anticipated, and integrated O&G service providers will be in a stronger position to provide superior delivery capabilities. Large jobs require scale, breadth of specialist skills, and financial strength to be successfully delivered." Meanwhile, the merged entity will fulfil six Entry Point Projects pertaining to the Malaysia O&G sector, primarily rejuvenating existing fields through enhanced oil recovery, developing small fields through innovative solutions, intensifying exploration activities, attracting multi-national corporations to bring a sizeable share of their global operations to Malaysia, consolidating domestic fabricators, and developing engineering, procurement and installation capabilities. OSK Research says in a report on the merger that both companies were keen as it would create a bigger entity as a more complete 1-stop solution provider for the O&G industry. "Being bigger would enable the combined company to compete with its international O&G peers, especially in venturing beyond Malaysia, while being a 1-stop solution provider would tie in with Petronas' style of awarding contracts to a single contractor, which can better manage project costs, timelines and deliver quality," it said. The research house adds that there are merger synergies for both companies - Kencana's strength lies in fabrication while SapuraCrest is good in installation of pipelines and facilities as well as provision of drilling services. "Both companies have a strong asset base to support their businesses, with Kencana having a 172-acre fabrication yard in Lumut while SapuraCrest has some 5 workboats (including Sapura3000), as we understand it, and a few other offshore support vessels as well as five tender rigs," OSK Researh says. Size is important in the O&G industry since it is a highly capital intensive business and a bigger entity will have a higher success rate when bidding for new contracts and increasing the chances of being picked as the main contractor, which commands better margins for work done compared to doing the same work as a sub-contractor. However, sources say that the merger is expected to create revenue synergies as opposed to cost synergies. "Because the companies complement each other so there is not much overlap, we don't expect much cost savings. But some streamlining can be expected in the front liners and middle office on both sides," he adds. While layoffs can be expected typically in mergers, sources say that both companies are in need of engineers and will likely see the redeployment of management personnel to various units. The merged entity will see a staff strength of some 7,000 individuals. On the surface, the proposed SapuraCrest-Kencana merger seems to have more merits than negatives. But the key challenges will truly arise when the integration of both companies begin to merge, but in the meantime, the market will be watching this new merger saga with keen eyes. Related Stories: |
| Posted: 15 Jul 2011 05:53 PM PDT IN January 2007, the 10 member countries of Asean agreed to establish the Asean Economic Community (AEC) by 2015. However, few details have been revealed on the efforts to transform the association into an economically, and not just politically, significant bloc. Essentially, the AEC is meant to allow the freer movement of goods, services, skilled labour and capital within South-East Asia. In other words, Asean is trying to set up a single market. We think this is necessary because if you look at this bloc as an asset class, it is a compelling investment opportunity. The Organisation for Economic Cooperation and Development (OECD), for one, considers South-East Asia "a region of strategic importance" to developed countries. More soberingly, a single market is the only way Asean will be able to hold its own economically against the might of the United States, the European Union and, increasingly, China and India. An idea like the AEC would once have been considered unthinkable, particularly in the wake of the 1997 Asian financial crisis, which erupted in Thailand, a founding member of Asean, and which sent shockwaves throughout Asia. But when the US credit bubble burst in late 2008 and set off another global financial crisis, Asean economies clawed their way back to a V-shaped recovery that underscored just how much the bloc had improved on its macroeconomic and financial policies since 1997. Asean's attractiveness to investors grows when you consider that the region is relatively stable and, better yet, has a relatively young consumer base. So it has a lot going for it, including having major agricultural commodity producers; five financial centres in the Global Financial Centre Index (which measures the world's 75 top financial centres); a number of world-class companies with strong earnings growth; and, last but not least, a strong regulatory environment that is investor-friendly. It is also a hub for a wide range of merger and acquisition activities that offer investors many opportunities in frontier economies and markets. For better balance, Asean has of course to, among others, improve on its fiscal policy framework to be in line with the medium-term policy goals of the national development plans of its respective members. We also appreciate that any move towards establishing a common Asean currency is radical and, frankly, decades away from being realised. The world, however, is likely to see Asean making continued efforts to link its bourses, liberalise intra-and inter-regional capital flows and permit banks in one member country operate in all, or at least most, other member countries. To be sure, Asean has its work cut out for it in trying to bring about the AEC. For starters, it will have to scrutinise the finer details of listing rules in its members' bourses as well as legal requirements for companies that affect the investment strategies of regional fund managers. As an example, we reviewed recently treasury stocks and their uses in three Asean countries, namely Malaysia, Singapore and Indonesia. Our interest in this subject was piqued when an Indonesian public-listed company (PLC) transferred its treasury stocks to a Singapore nominee company to use those as currency for an acquisition. The very news of such a transfer was in itself unusual, to say the least. That had us burrowing into precedents and reviewing the rules that regulate treasury stocks in Indonesia, Singapore and Malaysia. We learnt that there are provisions that suspend the voting rights of those holding treasury stocks. This was a huge relief to us as these provisions are something positive because they favour good corporate governance and so are aligned with the general trend globally, which is either to eliminate treasury stocks altogether or not allow shareholders using treasury stocks to vote in support of management at annual general meetings. In the process of discovering that, we also found some differences in the laws of the three jurisdictions, which are as follows: ● Singapore is far more flexible about how treasury stocks may be used, including allowing such stocks to be transferred as payment, or what the law calls consideration, for acquiring shares or assets of a company or person; ● Indonesia limits the period during which companies may hold treasury stocks. It also provides that rules on such stocks may be relaxed if the Indonesian market is in potential crisis; and ● Malaysia's approach to treasury stocks is plain vanilla, allowing companies merely to cancel, retain or re-sell such stocks as well as distribute the stocks as share dividends. From an investor's perspective, Asean's market regulators need to go through such differences in member jurisdictions as soon as possible, so as to streamline the fiscal framework and smoothen market integration initiatives. It should do so by drawing up a clear road map with set milestones. This would show potential investors that Asean has a systematic approach to establishing a single market. Conversely, investors and their fund managers would run for cover and red-flag Asean as an "avoid" region if they get wind of cases such as companies transferring treasury stock from one Asean country to another just for an acquisition. From a listing perspective, potential market entrants may choose to list in jurisdictions that have far more flexible laws for dealing with complex corporate scenarios. Asean's huge investment potential is often overlooked, which is a pity as it has all that it takes to be a real long-term winner in the emerging market scene. But it would certainly simplify trading across Asean markets for fund managers if the bloc's regulatory investment framework were more homogenous among its member countries. ● Shireen Muhiudeen is managing director of Corston-Smith Asset Management in Malaysia, a fund management company that makes investment decisions based on corporate governance. Full Feed Generated by Get Full RSS, sponsored by USA Best Price. |
| Posted: 15 Jul 2011 05:01 PM PDT Practically Radical Author: William C. Taylor Publisher: HarpersCollins BUSINESS people everywhere are engaging in a dramatic "rethink" of how they lead, work and get results. How do you break new ground when there is so much pressure to do things the same way as everyone else? This book offers radical ideas and practical ways to help fix what's wrong, launch new initiatives with the best chance to succeed, and rethink the logic of leadership itself. Some of the companies researched for this book include IBM, Zappos, Swatch and Interpol. Value: The Four Cornerstones of Corporate Finance Authors: Tim Koller, Richard Dobbs and Bill Huyett Publisher: John Wiley & Sons PARTNERS from management consulting firm of McKinsey & Company describe the basic principles of value creation and their relevance. The four areas are the value of a business, conserving that value, performance and stock market expectations and management strategy. The Copywriting Sourcebook Author: Andy Maslen Publisher: Marshall Cavendish THIS book helps readers to write a copy and provide real world examples. It also shows shortcuts to write a copy, and explains how a professional copywriter goes about his work. The author has two other titles, Write to Sell and 100 Great Copywriting. Full Feed Generated by Get Full RSS, sponsored by USA Best Price. |
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