WHISPERS of a takeover of national car-maker Proton Holdings Bhd sprout every now and then. Talk of acquisition often grows more audible but eventually fizzles out into nothing more than posturing by the usual suspects eyeing a slice of the protected and should-be lucrative car market.
This time, however, the circumstances are vastly different. Proton has virtually bet its future on the resurrection of unit Lotus and is starved for cash to grow the bread-and-butter passenger car segment of its business and invest in the next generation auto technologies such as hybrid cars.
Adding to the growing belief that a sale will finally materialise has been the ongoing programme by state funds to dispose of assets to the private sector as a way of not only raising cash but more essentially injecting much needed entrepreneurship into the businesses that it owns.
Such a scenario now has added more credence to the thought that control of Proton is now up for grabs and the field of potential candidates remains the perpetual favourites for 42.7% block Khanzanah Nasional Bhd owns. The list of prospective new owners, however, has grown to what appears to be aspirants that have the capability to take over one of the most divisive companies in the country.
In the driver's seat
The shortlist of Malaysian companies that are able to take over and run Proton is not long but there is growing opinion that the favoured one is DRB-HICOM Bhd,
It's bid for Proton received a boost when it was publically favoured to be the new onwer of Proton by former Prime Minister and Proton advisor Tun Dr Mahathir Mohamad.
The one-time controlling shareholder of Proton some 11 years ago, DRB-HICOM Bhd of today is largely different from the company that once held the reins of the national car maker.
Back in December 2000, under the stewardship of Tan Sri Mohd Saleh Sulong, DRB-HICOM sold its 25.8% stake in Proton to national oil giant Petroliam Nasional Bhd (Petronas) for RM981mil or RM7 per share as part of its restructuring process.
In a circular to shareholders in Sept 2000, DRB-HICOM had pointed out in its rationale for the sale of its stake in Proton that in order to remain competitive in the car industry, substantial capital outlay would be required for future plant upgrading and continuous research and development work.
"Competition is keen, especially in the passenger car segment as automotive companies are continuously striving to produce innovative models with cutting edge technology to meet customers' demand," noted DRB-HICOM in the circular.
Mohd Saleh's rationale for selling Proton in uncanningly similar to the predicament the company is in today and DRB-HICOM, after going through another round of reorgansiation under new ownership, appears to be in better health than the company that sold Proton.
DRB-HICOM is involved in the automotive, services as well as property, asset and construction sectors.
It is one of the biggest automotive groups in Malaysia, with vehicle distribution and assembly operations and ties with marques such as Audi, Mercedes-Benz, Honda, Suzuki, Mitsubishi, Isuzu, Mahindra, Volkswagen, Yamaha and Potenza Sports Cars.
DRB-HICOM also controls national motorcycle manufacturer Motosikal Dan Enjin Nasional Sdn Bhd (Modenas) and owns Puspakom Sdn Bhd, which has a concession from the Government to inspect and test motor vehicles.
It's tie-up with VW is seen as a big plus in its pursuit of Proton. Khazanah was close to roping in the services of VW years ago in its attempt to revitalise Proton but was rebuked at the last minute by parties that saw things differently.
There might be a possibility that VW might rekindle its interest in Proton's manufacturing facilities or emerge as a strategic partner once DRB-HICOM gains control of Proton but as for now, there have been no overtures towards that at the moment.
DRB-HICOM has invested close to RM2bil in a automotive complex in Pekan, Pahang where there is a workforce of 2,300 which may grow by another 800 people once the local assembly of Volkswagen cars gets fully underway.
In its annual report for the financial year ended March 31, 2011, DRB-HICOM pointed out that it is the only conglomerate involved in the whole integrated chain of the automotive ecosystem, and has developed world-class expertise and facilities that have positioned Malaysia as a regional hub for the automotive industry.
In its 2011 financial year, the automotive sector contributed RM4.04bil or 59% of total group revenue and Proton is an important cog in that.
DRB-HICOM group managing director Datuk Seri Mohd Khamil Jamil recently said that almost 60% of the group's automotive revenue came from business ventures with Proton.
The links DRB-HICOM has with Proton stems from two areas component manufacturing and the sale of Proton cars in which DRB-HICOM through its unit Edaran Otomobil Nasional Bhd is the master dealer for Proton.
Mohd Khamil said the group's manufacturing and engineering companies are all first-tier vendors to Proton, with an annual contribution of RM600mil- RM700mil worth of business.
As an example, the group's 51%-owned HICOM-Teck See Manufacturing Malaysia Sdn Bhd is the largest plastic automotive vendor in the country, and supplies replacement and facelift bumpers (for the Perodua Myvi and Proton Saga), instrument panels (for the Proton Waja and Persona, Honda Civic) and chroming emblems (Honda Civic).
Another factor is the consolidation of Proton's dealership network. DRB-HICOM's EON has 32 sales and service outlets in the country and Proton Edar has 28 sales and 32 service outlets.
OSK Research points out that although operationally, the dealership network between Proton Edar Sdn Bhd and EON has been integrated, a further consolidation of ownership between the two could potentially see even more efficiencies and cost-cutting enhancements moving forward.
Naza Group also in the picture
The race for Proton, however might not be cut and dry as it appears. The Naza Group has also reportedly courted the ownership of Proton is said to have submitted a proposal to take over Proton.
The Naza Group, founded by the late Tan Sri SM Nasimuddin SM Amin and helmed by his sons Datuk SM Faisal and SM Nasarudin today, is deeply involved in the distribution of imported cars and marques such as Peugeot and Kia. It also has an extensive property portfolio and other businesses such as hospitality, food and beverages, finance and insurance and, manufacturing.
Naza might go solo in its chase for the Khazanah block in Proton and given its history and depth in the auto business, it stands a chance of clinching the deal. But there is a train of thought that should it team up with General Motors, in which Naza has a relationship through the distribution of Chevrolet cars, it stands a better chance.
The likelihood of foreign participation in the fight for Proton received the backing of Dr Mahathir who says an outright control of Proton is frowned upon but a joint bid with a local party running the show will be more acceptable.
The Naza Group signed a distributor deal for Chevrolet vehicles in Malaysia last year.
Both the Naza Group and Chevrolet's owner General Motors (GM) are interested in setting up a local vehicle assembly venture for the American marque.
Research analysts say Chevrolet which has a plant in Rayong, Thailand is eyeing a bigger share of the Asean automotive market and there have been reports that GM has started talks with Proton for a potential vehicle assembly joint venture in Malaysia.
The success of the Naza-GM partnership however hinges on the willingness of the American company to plough in money and models into Malaysia and there is doubt if GM is willing to uproot some of its capacity from Rayong in Thailand.
OSK Research says it sees little synergy for a Naza Group-GM-Proton tie-up "as GM already has a state-of-the-art facility in Thailand."
The UMW factor
UMW Holdings Bhd, which through the sale of Toyota cars and its share of the business of Perodua sales makes it a dominant player in the non-national segment, and would be a candidate to take over the running of Proton should it choose to put its name in the bid race.
But any suggestion of doing so at the current time has been ruled out by the company. UMW Holdings told the stock exchange it has not submitted any bid to Khazanah for the acquisition of Khazanah's stake in Proton and is not in any form of discussion with any parties in this regard.
The group's corporate communications unit told StarBizWeek via email that "the UMW Group has not received any such offer nor had been approached by Khazanah regarding Proton."
Analysts do not think UMW's principal Toyota Motor Corp will want to expand its operations in Malaysia via an acquisition and while it is tempting to gain more market share in Malaysia, Toyota and its unit Daihatsu has in the past resisted attempts to merge Proton with Perodua. But if they do have a change of heart, then it will certainly add a new dimension in the race to control Proton.
Acquisition price and structure
Regardless of whichever party takes over Proton, a key issue will be the cost of doing so.
Media reports have said the bids for Khazanah's stake may be in the range of RM6 and RM7 a share, which RHB Research Institute notes is lower than Khazanah's entry cost of RM7.50 to RM9 per share.
HwangDBS Vickers Research says Khazanah may choose to sell a stake of less than 33% to avoid the bidder having to make a mandatory general offer (GO) but indications are that a full sale of Khazanah's shares is its preferred route.
RHB Research Institute has put a fair value of RM5 per Proton share, and says minority shareholders looking for a GO could be disappointed.
It says a 30% stake in Proton at RM8 per share would cost RM1.3bil.
"A sweetheart deal at say, RM8 per Proton share by a new strategic shareholder, would unlikely involve a stake exceeding the GO threshold of 33%. There would be little sense in paying such a large premium to the minorities. Shareholders of a listed entity offering an excessive premium for Proton's shares are also likely to react negatively."
In a report, CIMB Research says a GO in the region of RM7 per Proton share would entail a RM3.8bil investment.
"Thereafter, capital expenditure in Proton is estimated at RM900mil a year. With the removal of research and development benefits, this would increase to RM1.2bil. A cash call would be needed both at DRB-HICOM and Proton levels."
The research house says a takeover of Proton at RM6 to RM7 per share would not be earnings accretive to DRB-HICOM unless the conglomerate had the mandate to restructure the national carmaker.
CIMB Research says restructuring options could include taking Proton private and merging its assets with DRB-HICOM's auto assets into a special purpose vehicle (SPV).
"The valuation of DRB-HICOM's existing auto assets is estimated at RM2.4bil based on seven times calendar year 2013 price-earnings ratio. Combining this with the RM3.8bil GO valuation of Proton, the enlarged auto group would be worth RM6.5bil."
Analysts also think Volkswagen could be invited for an equity injection into the SPV.
"Volkswagen will not own a direct stake in Proton, which will maintain its national identity. This would allow for a valuable spin-off of the SPV in an amalgamated listing at a later date."
CIMB research also notes that with the acquisition of Proton, DRB-HICOM could offer vehicle assembly facilities in Pekan as well as full manufacturing facilities in Tanjung Malim and Shah Alam, capable of ramping up long-term production capacity to one million units a year.
"We believe Volkswagen may be interested in taking a strategic stake in the enlarged auto entity as it would be a perfect platform into Asean."
Industry observers also point out that DRB-HICOM will be embarking on the assembly of Audi cars in Malaysia and with VW having plans for regional distribution and using Malaysia as a manufacturing hub, the added capacity of Proton's plants will be enticing for DRB-HICOM.
RHB Research Institute also believes DRB-HICOM has the financial capacity to buy a substantial stake in Proton.
"DRB-HICOM's balance sheet is relatively unstressed with a net gearing of just 0.14 times or net debt of RM722mil."
Whoever takes over Proton can also look at the potential sale of the group's landbank in Shah Alam, where another Proton main plant is located.
OSK Research says the landbank in Shah Alam could fetch at least RM500mil in additional capital expenditure funding for Proton.
It notes that DRB-HICOM had recently announced it was raising RM500mil from the sukuk market to fund its working capital as well as other potential acquisitions and expansions.
"DRB-HICOM has an option to maximise this sukuk issue to RM1.8bil. Its net gearing ex-bank related assets and liabilities stands at only 17%, as indicated by its last quarterly results, and this can be maximised easily to 50% to acquire Proton."
Proton's net assets per share as at Sept 30 was RM9.81.
However, OSK Research says the Naza Group might find funding the acquisition of Proton to be a problem as "Naza's property development business is expanding in a big way. The fact that Naza is a private company presents a window for its eventual listing to raise funds."
RHB Research Institute says Proton could facilitate a backdoor listing for the Naza Group's auto businesses.
"Existing Proton shareholders could be diluted by the entry of the Naza Group although they will end up with a smaller share of a bigger business and also benefit from the injection of some entrepreneurial energy."
Management changes unlikely
Research analysts and auto industry observers say it is unlikely there would be management shake-up at Proton in the event of a takeover.
They say Proton group managing director Datuk Seri Syed Zainal Abidin Syed Mohamed Tahir and his management team has done well in the last few years.
"As far as the domestic front is concerned, Syed Zainal has done a good job," says a bank-backed analyst.
Syed Zainal, who was formerly deputy managing director at Perusahaan Otomobil Kedua Sdn Bhd (Perodua), joined Proton in January 2006 when the national carmaker was ailing.
The same year saw Proton facing increasing competition, declining motor sales and a lower share in the domestic car market.
It was in 2006 that Proton lost its crown as the top-selling national carmaker, when Perodua outpaced Proton significantly by selling 152,733 cars.
Proton sales in 2006 dipped to 115,538 units (compared with 166,118 units in 2005).
Since then, Proton has seen significant sales improvement fuelled by demand for its new Saga, Persona, Exora and Inspira models which were introduced within the last four years.
Auto industry observers point out that under the helm of Syed Zainal and his team, Proton has narrowed the sales gap with Perodua considerably in recent years.
Malaysian Automotive Association reports showed that for the first 10 months of 2011, Proton sold 136,589 units (compared with 145,825 units sold by Perodua).
Despite the fine job the present management at Proton has done, the perogative of keeping the current team intact will be that of the new owners.
PROTON : [Stock Watch] [News]
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