Good Merger News

Malaysia

Economic News

22 Jul 2010
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The Malaysian stock exchange (Bursa) is bracing itself for the debut of the re-formed Sime Darby, the special-purpose vehicle created by the merger of three of the largest palm plantations in the country - Sime Darby, Kampulan Guthrie and Golden Hope Plantations.



The merger has rarely been out of the news in the past year and many have been eagerly awaiting the official November 30 listing of the new Sime Darby, which holds the unique position of being Malaysia's largest corporate merger to date, with a market capitalisation estimated at $17.65bn.



According to company, Sime Darby will be positioned as a diversified Malaysian multinational conglomerate, with core businesses in plantations, energy and utilities, property, heavy equipment and motors.



Ahmad Zubir Murshid, president and CEO of Sime Darby, told OBG, "Contrary to what many analysts and investors are speculating, the new Sime Darby is more than a plantations company and there will be no disposing of the non-plantations business. The new Sime Darby will be a replica of the original Sime Darby [...] operating in the businesses that reflect Malaysia's economy."



Analysts forecast that the initial share price will be bolstered by bullish crude palm oil prices and the recent announcement the company has been awarded a $2bn undersea cable project. Many see the listing as a much-needed boost for the Kuala Lumpur Composite Index (KLCI) following a period of dampened investor sentiment caused by the US sub-prime mortgage crisis, surging oil prices and the overall slowdown in the US economy.



Upon listing, the market capitalisation of Sime Darby could account for up to 9% of the index's entire capitalisation. According to OSK Investment Bank, it could provide a lift to the benchmark of up to 30 points.



Investor interest in the company was further bolstered last week when its energy and utilities businesses received permission from the Malaysian government to acquire a 60% stake in Sarawak Hidro, the operator of the Bakun hydroelectric dam.



The dam, which is located in the state of Sarawak on the island of Borneo, is expected to be completed by 2010. It will cost $1.8bn to construct and is expected to supply 2400 MW of electricity. Sime Darby hopes to bring power from the dam to Peninsular Malaysia - where the bulk of Malaysia's industry and population reside - through the construction of two 700-km undersea cables, at an estimated cost of $2.67bn. It is understood the first cable will be ready for transmission by 2013, with the second ready in 2015. Assuming the plant runs at its full capacity, 1600 MW will be transmitted to Peninsular Malaysia.



Demand for power in Malaysia is expected to rise 6.7% annually from now until 2015 according to the ministry of energy, water and telecommunications, and the project is of great importance given the current environment of escalating oil and gas prices.



Zubir said he foresees the new Sime Darby as the Wal-Mart of Malaysia in the sectors it will operate, citing that in the property business, sheer size and economies of scale will allow for greater purchasing power and speed of delivery. Zubir told OBG, "For property development, upon the merger, we stand to be one of the, if not the biggest, companies in Malaysia in terms of land bank, turnover and revenue." The group has stated it will position itself as a community developer rather than a property developer, with a focus on greenery and space rather than city centre condominiums.



Aside from its plantations and electricity businesses, the group has stated it will heavily target China to capitalise on the country's growth in consumer spending, mining and construction. Sime Darby already has a strong presence in China, Hong Kong, Singapore, the Philippines and Australia, where it holds dealership rights for brands such as BMW, Land Rover and Caterpillar.



The plantations part of the group accounted for 43% of its $1.1bn in operating profits in 2007 and is where analysts believe most of the synergies from the merger stand to be gained. Zubir told local media a significant focus over the next few years will be on the plantations sector, due to rising crude prices. Through the merger, it stands to become the world's largest plantations group, with a pooled land bank of over 600,000 acres.



The Sime Darby merger has been welcomed as a positive step overall for the Malaysian plantations industry, as it will increase exposure to international markets. Peter Chin Fah Kui, Malaysia's minister of plantations industries and commodities told OBG, "The deal will create the world's number-one palm oil producer, giving it greater bargaining power at an international level."



But the merger and listing are not just good news for the palm oil industry. As Hamad Kama Piah bin Che Othman, president and group CEO of Permodalan Nasional, Malaysia's biggest fund management company and majority shareholder in Sime Darby, told OBG, "The newly formed company will not only reshape and strengthen Malaysia's position as a palm oil producer, but also add liquidity and clout to the market capitalisation of Bursa Malaysia."

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