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Saturday, November 29, 2014

What now for Perak Corp?


Ten months on, it looks like Perak Corporation Bhd may not be going private after all. But what of the proposed new ventures that sparked the proposal in the first place? Perbadanan Kemajuan Negeri Perak (PKNP) will have some explaining to do if these new ventures are shelved.
So the proposed privatisation of Perak Corporation Bhd has hit a snag. The deal-breaker here is Sime Darby Property Bhd, who declared last week that they will vote against the proposal if an extraordinary general meeting is convened.
This hurdle is tricky because Sime Darby Property has sufficient shares to block the exercise with 6.13% of Perak Corp’s total shares base. Given that the offerors, who control 52.9% collectively when the proposal was mooted in January, cannot vote, Sime Darby Property effectively has 13% of the votes at play in such a meeting.
And any such proposal cannot go forward if the votes against the proposal exceed 10%. Therefore the offerors asked Perak Corp’s board to withdraw the proposed privatisation subject to the Securities Commission’s approval, according to regulatory filings.
So what now for majority shareholder Perbadanan Kemajuan Negeri Perak (PKNP)’s grand plans? It would be interesting to see if PKNP will push on regardless if it fails to take the company private.
To recap, in January PKNP proposed a selective share capital reduction and a corresponding capital repayment under Section 64 of the Companies Act 1965 worth RM183.69 million in cash payments. This translates into RM3.90 per Perak Corp share for the other shareholders.
According to regulatory filings, the rationale for the privatisation exercise was to accommodate for the changing business and risk profile of Perak Corp as well as to facilitate the internal re-organisation of Perak Corp.
The gist of it is that with sizeable land bank for property development in Perak, PKNP had intended to expand the company’s revenue base by moving into other property-related activities given stabilising revenue growth.
PKNP said it is eyeing the tourism and hospitality sector by leveraging on said land bank, following on from Perak Corp’s 2012 animation theme park joint venture in Ipoh worth RM503 million, given that the market for property development launches is quite limited in Perak where its land bank is located.
However these new ventures would have a long gestation period likely to exceed five years and would change the company’s risk and return profile as far as investors and shareholders are concerned, said PKNP, hence the privatisation exercise.
“In addition there is no certainty that the expected revenue contribution from these new activities will materialise,” said PKNP in January. “The group will be required to obtain borrowings and conserve its cash balances for the purpose of financing the new business activities.”
“Accordingly, it is expected that Perak Corp will face uncertainties with regard to its financial performance and cash flow position in the future and this may have an impact on its ability to pay dividends and the market price of Perak Corp shares going forward,” said PKNP further in January.
Perak Corporation LogoAnother reason was to ease the internal restructuring of Perak Corp to re-align the company’s activities with PKNP’s socio-economic objectives.
To summarise, PKNP apparently intended to try new, hopefully profitable ventures with Perak Corp’s land bank in the Perak state and wanted to spare shareholders the agony of waiting for returns — in fact, waiting to find out if there will be returns — and the anguish of owning shares in an entity that is changing direction from when those shares were originally purchased.
But Sime Darby Property’s refusal to play ball is intriguing. Are they implicitly saying that they are fine with the diversification risks and the potentially long gestation period of any new ventures?
Maybe but maybe not. Sime Darby Property’s opposition to the offer may simply be due to the fact that a good chunk of Perak Corp’s land bank appears acquired in the 1990s, according to the company’s latest annual report, which raises the question of how current the book values of these properties are.
The offered price of RM3.90 per share is already unattractive at the net asset value per Perak Corp share of RM5.32, according to regulatory filings. It would be interesting to compare the offered price to Perak Corp’s asset value per share following a fresh valuation of all the company’s assets.
However there is another question that begs consideration. What if other shareholders, too, want in on the new ventures that PKNP is eyeing for Perak Corp going forward?
As discussed in this column months ago, if shareholders want to come along for the ride, they should be able to do so.
The privatisation bid is a signal that despite the risk and the potential difficulties in pursuing new ventures, PKNP sees sufficient fundamentals to justify such new investments. If the potential rewards are well worth the risk in the long run, surely shareholders would stand behind PKNP in these new pursuits.
After all if these new ventures are really that risky, PKNP is amplifying the risk for themselves by taking full control through the proposed privatisation while at the same time closing the door on financing through the capital markets — this does not make sense going by the rationale for privatisation given by PKNP.
So PKNP is now in an interesting position: Shall they go ahead and propose the new ventures for Perak Corp if the privatisation doesn’t happen? They should, for the reasons outlined above.
But if PKNP doesn’t do this, they’ll have to explain why.
The essence of the privatisation rationale, as far as the new ventures are concerned, was to spare shareholders from the risk of new investments. But shareholders who are disinclined to participate can exit the company and invest somewhere else anyway.
If the fundamentals really does justify PKNP’s proposed new ventures then there should not be any problems in pitching these new activities to the rest of Perak Corp shareholders.
Most importantly, it does not seem like the proposed new ventures can only be undertaken by private entities. In other words, there should be no problems for Perak Corp to proceed with them as a listed entity.
Therefore shelving these proposals on the basis of the cancellation of the privatisation, on the other hand, would raise hard questions on why PKNP proposed privatisation in the first place.

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