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Issues  |  FEBRUARY 27, 2013 5:30AM

Will Selangor’s RM9.65 bil bid succeed?

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In the second of a four part article, KiniBiz looks at what Selangor’s RM9.65 billion bid for Selangor’s water assets mean, the implications and the chances of success.

 


 

After four years of back and forth, the Selangor government last week put its foot down and said enough is enough. With this, it made its fourth and final offer to take over the state’s water concessionaire for a total sum of RM9.65 billion.

If the concessionaires are unhappy, Selangor Menteri Besar Abdul Khalid Ibrahim said, the water companies–Syarikat Pengeluar Air Sungai Selangor Sdn Bhd (Splash), Konsortium Abass Sdn Bhd (Abass), Puncak Niaga Sdn Bhd (PNSB) and Syarikat Bekalan Air Selangor Sdn Bhd (Syabas)–can take it up in arbitration.

Latest reports indicate that  Selangor has won half the battle, with Abass and Splash indicating that they will accept the offer. This would mean 58 percent of the state’s water treatment capacity under the state’s control.

selangor-water-offer-CHARTBut analysts say that without PNSB and Syabas, the deal goes nowhere. This is especially so as Syabas is the sole distributor of water. Syabas is 70-percent owned by Puncak Niaga Holdings, which also wholly-owns PNSB. Holding the trump card is Puncak’s largest shareholder, and Umno-linked executive chairperson Rozali Ismail who holds 41 percent of the company.

And whether Rozali will take up the offer by the March 6 deadline depends on both politics and finance.

Is the Selangor offer fair?

On the numbers side, Abdul Khalid claims that at 12 percent return on equity, the offer is more than fair. Analysts, however, say that the rub lies in the valuations of assets.

selangor-water-takeover-offersAccording to Kenanga Research, the RM5.6 billion collectively offered to the Puncak entities is 20 percent higher than Selangor’s 2011 offer and is “fairly attractive”. (see chart)

CIMB Research said the deal could earn Puncak Niaga RM1.1 billion, but this is lower than its discounted cash flow value of RM1.5 billion for PNSB and Syabas. Am Research in a report last year valued Puncak water entities at RM1.66 billion.

Although the offer gives a premium of more than 100 percent above existing share price, it is still doubtful that Puncak will bite. It said that at RM2.70 per share, the value is not far off from previous state offers of RM2.23-2.73, rejected by Puncak.

There is also the ongoing dispute over the water concession agreement. This includes the refusal of the state to allow the promised tariff hikes, citing Syabas’ non-performance.

Partisan politics at play

Selangor argues that its decision to freeze hikes is based on the concession agreement, but its motivation is political. The Pakatan Rakyat government was voted in because it promised, among others, not to raise tariffs.

CIMB Research noted that the state has refused to pay RM1.9 billion for loss of income due to tariff freezes. The state is also adamant that it will not give any compensation, including for loss of future income from the concessions.

Tony Pua

Tony Pua

“There is no compensation for this. It doesn’t make sense (to provide compensation) and was not provided for in the concession agreement,” Pakatan Rakyat lawmaker Tony Pua, who is part of the state’s water consolidation committee, said.

Selangor has indicated that it may go ahead and take over Splash and Abass, with or without Puncak’s agreement, but the water analyst believes that this would only raise the political stakes.

If anything, said one analyst with an investment bank who declined to be named citing the sensitivity of the issue, a successful takeover of Splash and Abass would mean that politics would play an even more crucial role than before.

“We will see a head-on collision between Pakatan Selangor and BN federal-backed Puncak,” said the analyst.

Besides Rozali’s background as a former Selangor Umno office-bearer, previous developments may have given the impression that the BN federal government is on Puncak’s side.

In 2011, for example, federal agency Pengurusan Aset Air Bhd (PAAB) allegedly  “bailed out” Puncak through the purchase of the water bonds just as they were at risk of a downgrade.

“The failure of these companies to service their debts, had no bailout been offered by the BN administration, would have necessitated these companies to come to the table and negotiate the terms of restructuring with the Selangor state government or other parties which have made offers to acquire the businesses and assets.” Pua had said in a press statement.

What’s in it for Rozali?

Among all the concessionaires, Puncak is the only one who has played hardball and rejected all the offers. But prospects for Syabas are not so great. Besides the state government, it is also fighting legal battles with the other water treatment companies for not paying for treated water.

Scheduled-tariff-hikes-and-targeted-non-revenue-water-CHARTIf the state takes over Abass and Splash, can it wind up Syabas due to non-payments? “It’s more complicated than that. There are legal clauses which Syabas is relying on to pay less than what it owes, due to the freeze on tariff hikes,” the water analyst said.

He said that negotiating with Puncak may also go beyond the water industry. With Puncak Niaga dipping its toes in oil and gas, “other areas of compensation” might have been a reason for not taking up the deal just yet. Puncak Niaga’s oil and gas division is a contender for Petronas’ marginal oil field jobs.

For OSK Research, accepting the Selangor deal now would be risky, as it is happening so close to the election. What more with political pundits saying that both sides of the political divide having equal chance of winning Selangor.

Snap polls must be called before April 28, upon which the parliament is dissolved automatically. Elections must be held within 60 days of dissolution. The Selangor state assembly term matches the parliamentary term.

“This type of merger and acquisition could take months to complete…The impending dissolution of the Selangor state assembly may cause confusion as to the ultimate decision maker of this exercise.

“We believe that these types of transactions will need the blessings of the MB and possibly the approval of the state assembly,” OSK said.

A political proposition

Faekah Husin

Faekah Husin

For Selangor MB’s political secretary Faekah Husin, “it all depends on Rozali” and the only reason he would hold out is if he thinks he could get a better deal from an Umno-led government.

Rozali could not be reached for comment, but has in advertorials rebutting the Selangor government said that the decision is not solely on his shoulders. He said that the deal will also need buy-in from the 58.75 percent minority shareholders.

In a statement last week, he said that Puncak will need to check with the federal government, as it holds the golden share in Syabas. Minister in charge of water Peter Chin did not respond to calls or text messages.

“It is all politics, so our political proposition is this: we believe we can retain Selangor, and if Pakatan Rakyat takes over the federal government, too, the offer can be slashed up to half,” Faekah said.

Meantime, it looks like Selangor’s bid will only partially succeed with Puncak unlikely to accept the offer for its water assets.

 


 

Tomorrow: Is Selangor headed for a water crisis? Do we need more treatment plants?

Yesterday: Selangor water: Privatisation gone awry



 
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