Let’s KPI Khazanah

Was Asas serba's offer to take over the 23 toll road concessions for RM 50 billion rejected because Nor Mohamad Yaakob wanted it that way?

For that matter, had the offer been made by any other entity for RM 50 billion, would such an offer be cavalierly rejected?

I say cavalier because the boss at Khazanah, Azman Mokhtar made just a cursory mention that it had received an offer from Asas Serba. RM 50 billion and yet no considered evaluation? 50 billion isn't exactly small change is it?

He went on to say, PLUS highways are generating cash and profit and the highways belonged to the people. But we are never told the basis for rejecting offers to buy the PLUS highways. Surely the reasons to divest are there because Khazanah and EPF formed a SPV to take over the business.

My point is, if there are reasons justifying the eventual takeover of PLUS highways by the Khazanah-EPF JV, then the same reasons must have existed at the time when Asas Serba or MMC made their offers. Or the people from MMC and Asas Serba didn't think about these reasons?

We the 'people' who own the PLUS highways don't know what is happening.

Asas Serba offered to buy at RM 50 billion. That would make the owners RM 50 billion richer. RM 50 billion would go into the system and would probably increase liquidity. The government would probably save money by not having to pay compensation in the form of subsidies.

There was also an offer made by MMC group led by Syed Mokhtar alBukhari. It was also rejected. The offer was said to be somewhere in the region of RM 15-16 billion.

I always thought, the basic role of Khazanah, at least before being headed by Azman Mokhtar is to function something like Warren Buffet's Berkshire Hathaway. Basically it invests in sound companies and let those who are cleverer and better than them, manage and operate the businesses. It's a sovereign fund anyway.

In that way, it ensures the best returns to it as a stakeholder. It now seems Khazanah wants to micromanage everything which means it is running the business. It is now in business with the luxury of using money belonging to us the people.

Now, as we read the many public statements by Azman Mokhtar, the principle which he uses to reject or spurn an offer is to say it won't sell a profitable business. The other excuse he uses is to say a particular business belongs to the people. I like these two principles by which he swears because; we are going to take him on that.

Why did it reject a RM 50 billion offer without explaining? It gives rise to suspicions that a reasonably good business offer is rejected on some non-objective reasons. Why is Khazanah still being controlled by Nor Mohamad Yaakob when it is the finance Minister who should be in charge of it? Hasn't Husni Hanazlah got the steely determination in his constitution to counter Nor Mohamad Yaakob?

Has khazanah got a big war chest? Has it got money to spend around? Has Khazanah veered from its original objectives on which it was established?

A look at the management structure of Khazanah gives the impression it's a club for the alumnus of consultant companies. Mckinsey, Ethos and Bina Fikir. The 'best brains' said Nor Mohamed Yaakob at one UMNO General Assembly. These people would live and breathe by the code of KPI.

That's a lot of bull crap. Anyone who attended the fanfare-ish ETP presentation by Idris Jala would be immediately aware of the emptiness in that claim when the young cikus (a large number from McKinsey) manning the many booths were often hung out to dry.

We need to examine the incestuous practice of seconding or hiring consultants in charge of Khazanah and then having the same people consulting out their work to their previous companies. Do we need consultants to hire consultants?

I am still trying to make business sense from the purchase of PLUS highways by the SPV belonging to EPF and Khazanah. By doing so, it's tantamount to taking PLUS highways private in the same manner what Ananda Krishnan did to his company.

These two already owned chunks of PLUS highways. EPF already owns a 12.3 per cent stake and Khazanah holds 55.2 per cent of the firm that operates the lucrative North-South highway running from the northwestern tip of Malaysia to Singapore. The Employees Provident Fund (EPF) and state investment arm Khazanah Nasional formed a special purpose vehicle (SPV) to take over the assets and liabilities of PLUS at RM4.60 per share.

Why the takeover and how can it be justified?

The target became the subject of public interest when an unknown company called Asas Serba submitted a proposal to take over PLUS highways and the other 19 highway concessions from the respective owners for RM 50 billion. The offer included a reduction of toll rates by 20%. It sounded good. But the offer was received in a lukewarm manner and by Nor Mohamad Yaakob in an openly hostile manner. He went on to say, it cost the government over RM 200 billion to build the highways. In other words he was saying, over his dead body.

Was the offer rejected on sound business reasons? The SPV is taking over the 4 toll concessions held by PLUS for RM 23 billion, now RM 26 billion? The share was valued at RM 4.60 each. Asas Serba's offer of RM 50 billion was for all 23 toll road concessions. The rest are loss making entities. It didn't separate what it would have paid for the PLUS toll concessions. Was it a wrong strategy to lump its offer altogether giving anyone the lame excuse, it's difficult to know what the offer would be just for the PLUS assets.

So we have no way to ascertain whether had AS lodged an offer for PLUS, could Asas Serba financially manage to keep to its earlier promise of not only cutting toll rates by 20% but also keeping them flat until the end of the current concession agreement. Keeping it flat or reducing the tools rates is not a major issue, because the government compensates the toll operators anyway. The offer would be superior if in addition to offering that price, reducing the toll rates and keeping them flat over the entire tenure, it can say the government doesn't have to make any compensation. Did the government get this?

But Asas Serba's offer was already doomed from the start. First the group is said to be associated with Halim Saad or Daim Zainudin. Halim's Saad UEM group was taken over on the excuse that Halim could not exercise his put option. This is an old story which I am hoping to retell. The company he headed wasn't even bankrupt which would have really necessitated the government taking over his business empire. His greatest sin it seems to me, looking as an outsider was his inability to exercise his put option within the time limit and the general impression that he was linked to Daim Zainudin.

If the government then had wanted to help out, they could. Because it helped out other distressed companies such as Lion Group and Azman Hashim's Ambank. But the other two were not linked to Daim.

Then of course, you have the sage-like evaluations by analysts. One typical evaluation goes like this:- suppose AS buys PLUS in a leveraged buyout deal in excess of RM23bil, we wonder just how much financial wriggle room would Asas Serba have if much of PLUS' cash flow be used to service the debt taken on to fund any takeover. So? You have cash flow- do you just ogle over it? After it takes over, its cash flow belong to them and they will manage it in the best way they could.

Then, in a I-told-you-so very facile aside, a wry comment would go like "If something goes wrong with PLUS after a takeover by Asas Serba, would it then lead to another bailout?"

Others noted that the issue on who would eventually gain control of PLUS and its highways went beyond pricing concerns.

This is purely a private sector business proposal. If Asas serba should fail, the government can always sell it to the next buyer. Others will offer to buy them out. The mischievous question as to who would gain control over PLUS beyond pricing questions is just that- mischievous. They have got to be controlled by somebody in the end. Does it matter whether it's Z or Y.

The better question would have been, is Z better than Y.

Asas serba would certainly employ its cash reserves for some specific objectives. We haven't been told how they would raise their finance fully. PLUS's cash flow is an obvious candidate but we cannot discount the possibility of other sources. Now that the offer by Asas serba has been rejected, we don't have the chance to see the details of their offer.

My question is, have the offers from both Asas Serba and later Syed Mokhtar's MMC been scrutinized carefully and if they have, by whom? You can't expect Khazanah and EPF, to offer an objective evaluation.

Asas Serba said it planned to issue bonds with a dividend component to pay for the estimated RM50bil it would cost to complete the transaction. The bonds, which will be issued by the new concession company set up by Asas Serba and other new shareholders, would carry an annual coupon rate of 7% PLUS a share of profits that is equivalent to a 2.5% to 5% effective yield. The bonds with the dividend sweetener will be issued with tenures to be fixed based on the projected cashflow statements of the toll-road companies.

Asas Serba said the share of profits would give bondholders the benefit of sharing the upside of the returns to the new concession company. Its proposal contains a number of options for current shareholders and lenders. The lenders can cash out of their investment, invest in the bonds that the new concession company will issue or stay on as creditors. Shareholders too can choose to cash out, invest in the bonds or invest as shareholders in the new company.

The company believes that its plan would work as it centers on making the operations of the highways more efficient by reducing costs. The company feels it can cut costs by 15% in a short time and implement programs to raise non-toll revenue.

Now that the Khazanah-EPF SPV has taken over the PLUS highways, perhaps the best option available to Asas Serba is to take over the remaining 19 tolled highways and show they can make profit from there. Or as defined by Azman Mokhtar, because highways are the people's assets, then maybe Khazanah and EPF should plan to take over the remaining highways.

It would be interesting to speculate on who will get to buy the Plus highway should one day, Khazanah and EPF chooses to divest this business just as Azman Mokhtar's contract is not extended?