Takeover of PLUS

THE announcement on Oct 15 that the UEM Group and the Employees Provident Fund (EPF) plan to buy all of PLUS Expressways’ businesses and undertakings for RM23bil, or RM4.60 per PLUS share, has set the markets all abuzz.

Our basic standpoint is to examine the merits of the proposed transaction and apply a simple but practical litmus test: will minority shareholders get a fair deal under the proposed buyout?

PLUS Expressways group is the largest toll expressway operator in South-East Asia, and one of the largest in the world in terms of market capitalisation. Under the terms of the concession agreements, it is allowed to revise toll rates every three years, failing which the Government is contractually obliged to compensate it.

PLUS last raised rates in 2005 and has not increased them since due to accelerating inflation, and the effects of the global financial crisis on Malaysia. As a result, the Government has paid RM2.84bil in gross compensation to PLUS in just the three-year period to 2008. Last year alone, RM813mil or 25.6% of PLUS’ total revenues of RM3.18bil came from compensation payments. This could be untenable over the long term, given that Malaysia has incurred 12 consecutive years of fiscal deficits since the 1997-98 financial crisis, even though the economy has returned to growth in the last four to five years. Hence, it is hardly surprising that there are strong arguments for an extensive review of the concession agreements that PLUS and other toll operators benefit from.

The total acquisition price of RM23bil buys all of PLUS’ assets - the four Malaysian highway concessions (Projek Lebuhraya Utara-Selatan, Expressway Lingkaran Tengah, Linkedua (Malaysia) and Konsortium Lebuhraya Butterworth-Kulim (KLBK) and overseas assets - the Cikampek-Palimanan concession in Indonesia and three other toll assets in India.

Restructuring of concession

EPF and UEM’s involvement in the takeover of PLUS could include a restructuring of concession terms without the need to ask all the other shareholders. From the standpoint of national interests, this would be good for the rakyat as it may mean a cap on toll rates for the next five years.

The route for the UEM-EPF takeover is through the purchase of PLUS’ assets and liabilities. This requires an acceptance from a simple majority of the non-interested shareholders that own more than 50% of total shares.

What then if the price is unacceptable? Do minority shareholders have any say in the deal? Essentially, yes.

EPF currently holds 12.4% of PLUS shares, UEM holds 38.5%, while UEM’s parent, Khazanah Nasional, holds 16.7%. Collectively, the three entities own 68% of PLUS shares. They cannot vote on the sale as they are the parties involved in the matter. Non-interested shareholders hold the remaining 32% of PLUS shares. For the deal to go through, owners of just over half of these shares need to approve the deal. The bottom line is that owners of just over 16% of all PLUS shares have effective influence over the sale. When Kumpulan Wang Persaraan – which holds a 6.7% stake in PLUS as at March this year – and the other government-linked funds like AmanahRaya Trustees Bhd and Permodalan Nasional Bhd are added to the fray, the total interest in PLUS owned by government-linked entities amounts to about 15%.

So, the additional 1% needed to approve the sale must come from other minority shareholders.

PLUS is one of Malaysia’s largest companies, supported by a raft of international blue chip institutional investors – the kind we would love to see invest a great deal more in Malaysia. The list reads like a who’s who of global investment - Vanguard, Merrill Lynch, Prudential, Morgan Stanley, American International Assurance, Saudi Arabian Monetary Agency, JPMorgan Chase Bank, Blackrock, Government of Singapore Investment Corp Pte Ltd, and The Bank of New York Mellon.

To encourage this type of investment in the future, it is essential that the correct commercial rules are applied in the execution of this buyout and that there is a more than adequate level of mutual benefit from it.

The main quibble is with valuation. The range of fair value determined by analysts is anywhere between RM4 and RM5.30 per PLUS share. Note that the price was below RM4 per share for a long time and only breached this level about two months before the announcement.

Note too, that PLUS is not the only listed toll operator. Lingkaran Trans Kota Sdn Bhd, better known as Litrak, is the listed concessionaire of the Lebuhraya Damansara-Puchong. Any precedent set under the UEM-EPF takeover of PLUS and how it eventually pans out will have repercussions on how Litrak later resolves its own concession terms, which are due for revision on Jan 1, 2011 as well as other toll operators.

In the final analysis, minority shareholders need to evaluate the proposal and the independent advisor’s report, to determine the overall merits of the deal before making their decision to vote. - By RITA BENOY BUSHON

● Rita Benoy Bushon is CEO of the Minority Shareholder Watchdog Group.