This article first appeared in The Edge Malaysia Weekly on January 11, 2021 - January 17, 2021
DAGANG NeXchange Bhd’s (DNeX) bid for Khazanah Nasional Bhd’s semiconductor fabricating company SilTerra Malaysia Sdn Bhd, is only valid until the end of this month. That is because its Chinese partner Beijing CGP Investment Co Ltd’s approval from its government to take funds out of the country for the purpose of acquiring SilTerra will lapse at end-January, according to sources close to DNeX.
“If the government and Khazanah cannot make a decision before Jan 31, the approval will lapse and it will not be easy to request for another approval to take out the funds,” one of the sources tells The Edge.
China has been imposing capital controls over the last few years in an effort to stabilise the value of the yuan and reduce risky investments made by Chinese companies. However, state-owned enterprises are given some leeway in their capital outflows.
Beijing CGP is owned by the Beijing municipal government (the anchor investor); China Integrated Circuit Industry Investment Fund (CICIIF), an investment fund owned by the Chinese government to develop the semiconductor industry; E-Town Capital, a state-owned investment vehicle in the high-tech industry; and China Cinda Asset Management Co Ltd, a large asset management company owned by China’s Ministry of Finance.
DNeX is one of two local bidders for loss-making SilTerra, with the other being Green Packet Bhd.
DNeX has offered a total of RM470 million for the acquisition of a 100% stake in the Kulim-based chip foundry, in which it will hold 60% and Beijing CGP 40%. The offer includes the assumption of SilTerra’s debts amounting to RM210 million.
It is worth noting that DNeX’s offer is the lowest among the four initial bidders, including a US$150 million bid by Hon Hai Precision Industry Co Ltd (Foxconn) and another by German-based X-Fab Silicon Foundries. It was reported, however, that DNeX and its Chinese partner would inject almost RM500 million into SilTerra should they succeed in their bid.
It was also reported that Khazanah had decided not to sell SilTerra to foreign companies directly but only those that have formed strategic partnerships with local contenders. So, it is now a two-horse race between DNeX and Green Packet.
Green Packet’s proposal for SilTerra comes with two options. The first is an offer of RM235 million that includes a 30.25% bumiputera stake to be held by Md Radzi Din, CEO of Atilze Digital Sdn Bhd, a subsidiary of the group that focuses on the Internet of Things.
The second is an offer of RM334 million cash in return for higher foreign ownership. However, if it is allowed to own 100% of SilTerra without direct bumiputera ownership, the offer would be raised to US$150 million.
Green Packet plans to invest up to RM500 million in SilTerra to fund its growth. The group is partnering Dongfang Huijia Zhuhai Asset Management Co Ltd (better known as Orient Excellent), a renowned private equity firm in China with a fund size of more than US$700 million.
Orient Excellent’s shareholders are Konka Group Co Ltd, an electronic conglomerate in China with a 40% stake; and China Orient Asset Management Co Ltd (40%), a state-owned financial enterprise set up by China’s Ministry of Finance and the National Council for Social Security Fund. The remaining equity interest is held by its management team. It is not known whether Orient Excellent had secured the approval of the Chinese authorities to remit the funds required for the bid.
Earlier, the higher bid by Foxconn saw Khazanah considering selling the chip foundry to the Taiwan-based electronics manufacturing services giant. However, it is understood that the Malaysian government advised against the idea. That is because SilTerra — which was set up by the government in 1995 to move up the semiconductor value chain — is considered a national strategic asset, and selling a 100% stake in the foundry to a foreign entity could turn out to be a political hot potato.
There had been previous attempts to sell SilTerra prior to the latest round initiated last year.
China has been ramping up investments in integrated circuits to enable the country to be self-sufficient when it comes to technological development. It is still dependent on Taiwan, Japan, South Korea and the US for semiconductor design and manufacturing.
The Chinese government has pledged to invest US$1.4 trillion until 2025 to develop its semiconductor industry. The CICIIF is one of its initiatives, with the fund having raised RMB200 billion (RM124.9 billion) for its Fund 1, or Big Fund.
Among the investments made by the Big Fund are a US$2.3 billion post-IPO equity stake in Semiconductor Manufacturing International Corp in May 2020 and participation in the Series D fundraising of Anlogic — a field-programmable gate array chip producer — for an undisclosed sum in June 2019.
On Jan 7, DNeX closed at 21 sen per share, giving the company a market value of RM400.7 million. For the nine months ended Sept 30, 2020, the company made a net loss of RM14 million, compared with a net profit of RM33.76 million in the previous corresponding period.
Meanwhile, Green Packet closed at 41 sen per share last Thursday for a market capitalisation of RM467 million. The group saw a net loss of RM52.87 million for the nine months ended Sept 30, 2020.
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