Conglomerate Sime Darby Bhd is in negotiations to acquire Sapura Resources Bhd’s BMW dealership held under wholly owned Sapura Auto Sdn Bhd, industry sources say.

The price tag for the dealership is being bandied about at some RM40 million, says a source, adding that details of the acquisition are still being finalised. It is learnt that Munich-based Bayerische Motoren Werke AG, the parent company of BMW, has to give the nod for the acquisition to go through.

Sime Darby has strong ties with BMW, especially with its established BMW dealerships in various parts of this region, including here and in Singapore, China and Hong Kong. In Malaysia, the conglomerate’s BMW business is held under its wholly owned unit Auto Bavaria Sdn Bhd. Also, Sime Darby Auto Imports Sdn Bhd is the approved permit holder for importing BMW cars into Malaysia.

Besides this, Sime Darby also has a 49% stake in BMW Malaysia Sdn Bhd, which is the wholesaler of BMW cars, spare parts and accessories and is also involved in marketing, after-sales service and other related activities. Bayerische Motoren Werke holds the remainder 51% of BMW Malaysia.

Sapura Auto operates from a 60,000 sq ft premises in Jalan Tun Razak. According to Sapura Resources’ annual report, this dealership and its assets have a net book value of RM24.8 million. The RM40 million price tag is likely to include inventories such as cars, parts and machinery.

For Sime Darby, which has a market capitalisation of RM51 billion, the acquisition will further expand its automotive business, which includes the Hyundai, Alfa Romeo, Land Rover and Ford marques.

However, the sale of the BMW dealership will have huge impact on Sapura Resources, as the business is the core activity of the company. Besides the BMW dealership, Sapura Resources is also involved in the provision of higher eduction through University College of Technology and Innovation and Asia Pacific Institute of Information Technology (APIIT), including the APIIT Smart School. The company also has a small property development unit.

According to Sapura Resources’ annual report, the education arm accounted for 24% or RM54.7 million of its revenue for FY2009.

BMW has been doing well in Malaysia. According to news reports, BMW Malaysia sold 3,564 vehicles in 2009 from 3,514 a year earlier — a commendable figure considering the economic uncertainties. BMW’s share of the premium segment in the automotive sector also increased to 40% last year — second only to the 49% market share held by Mercedes Benz.

Despite the BMW dealership being a lucrative business, Sapura Resources is believed to have faced difficulties in managing its single dealership, along with competing with more established players.

When it first ventured into selling BMW cars in May 2006, Sapura Resources had said: “(The company) intends to connect directly with the end-consumer and to be the brand provider of choice for its chosen products and lock-in high-value end consumers. This may ensure continued revenue and profitability growth.”

However, this failed to materialise, especially as it faced competition with other BMW players like Sime Darby, Ingress Corp Bhd and Quill Capita Trust, and also thinning margins.

“The auto business is not as simple as people think. There are a whole host of variables and the high marketing expenditure, especially for high-end cars. Margins are also coming under pressure resulting in many (auto) companies struggling,” an industry player says.

Despite this scenario, Sapura Resources posted profits for the first nine months of FY2010 after three consecutive years of losses. For the three quarters to Oct 31, Sapura Resources posted a net profit of RM6.4 million on the back of RM205.1 million revenue, against a net loss of RM1.5 million on RM180.3 million revenue in the previous corresponding period. Earnings per share was 4.61 sen.

If the BMW sale goes through, Sapura Resources will have several things to consider. One is to acquire a new core business as its earnings driver. The company could also use the proceeds from the sale to reduce its relatively high debts, totalling some RM140 million — RM93.7 million in long-term unsecured loans and RM47.9 million short-term debt obligations as at end-October.

The finance cost for the debts for the nine-month period amounted to RM4.9 million or about 31% of the company’s operating profits of RM15.6 million.

Sapura Resources is 51.8%-controlled by Sapura Holdings Sdn Bhd, the vehicle of tycoon Tan Sri Shamsuddin Abdul Kadir and his family. Two of his sons — Datuk Shahril Shamsuddin and Shahriman Shamsuddin — sit on the board. Shahriman is also the company’s managing director.

In Sapura’s group of companies, oil-and-gas unit SapuraCrest Petroleum Bhd is seen as its jewel. Shahril and Shahriman own some 40.3% equity interest in SapuraCrest via Brothers Capital Sdn Bhd and have made it into a successful story, with its order book currently at some RM15 billion.

Sapura Resources closed at 43.5 sen last Friday after hitting its 52-week high of 54 sen on Jan 15.

This article appeared in Corporate page, The Edge Malaysia, Issue 791, Feb 1-7, 2010