This article first appeared in The Edge Financial Daily on August 21, 2019
Maintain market weight: The New Straits Times has reported that the government is planning to acquire 15 highways nationwide for RM43 billion via issuing debt to the concessionaires. Sources claimed the 15 highways will be acquired by a special-purpose vehicle (SPV), for example a “highway trust” set up by Khazanah Nasional Bhd, where once all parties involved in the potential deals have agreed with the highways’ enterprise value, Khazanah’s SPV would issue perpetual debt papers with one paper valued at RM30.1 billion (Paper A) and the other (Paper B) at RM12.7 billion to the concessionaires.
The takeover list of highways includes the North South Highway (PLUS) for RM30.8 billion, Prolintas (RM3.1 billion), Gamuda Bhd (RM5.6 billion) and IJM Corp Bhd (RM2.7 billion). However, no official offer has been made to the concessionaires for now as we expect the government to assess all the proposals thoroughly before making an official announcement.
We reckoned the concessionaire companies would accept the offer subject to fair valuations of their tolled highways and receiving shareholders’ approval. If the Ministry of Finance Inc (MoF) retracts its previous offer, we believe Gamuda would probably not accept the new offer if the valuations of its tolled highways are lower than the MoF’s RM6.2 billion offer. For construction companies with toll concessions, we have a “hold” call for Gamuda, IJM and Ekovest Bhd.
The new proposal has caught the industry by surprise, including Works Minister Baru Bian. Based on our checks, companies under our coverage have not been engaged by any parties concerning this proposal and the takeover amount. Separately, we believe this proposal is one of the alternatives to be discussed by the government.
Khazanah, on behalf of the government, will buy all 15 highways for RM43 billion via issuing Paper A partly funded via RM10 billion in cash and the remaining RM20 billion via debt, and Paper B of RM12.7 billion, with a government guarantee. Both papers are tradeable, with an annual 6% coupon rate or RM1.6 billion.
As such, the proposed privatisation would not burden the government to fork out a lumpy RM43 billion. The SPV would then be obliged to pay the coupon and maintain the highways via collecting congestion charges, which it can later exercise its option to redeem the debt papers using its cash flow. Additionally, other sources said the proposal would result in toll users saving up to 45% over time before benefiting from completely free tolls by 2038.
According to sources, the recent “highway trust” proposal is deemed more attractive versus the MoF’s proposal to buy Gamuda and Litrak’s tolled highways and Maju Holdings Bhd’s offer to take over PLUS. While this recent proposal and Gamuda’s toll takeover by the MoF have quite similar structures — for example, debt issuance for toll takeover and to be serviced by congestion charges — it is still premature to assess which proposal offers a better alternative to the government as each proposal’s details had yet to be revealed to the public.
Separately, we believe the recent proposed Gamuda toll takeover by the MoF will set a precedent for the upcoming toll acquisitions, with an improved mechanism benefiting the acquirer and acquiree. Currently, the MoF’s proposed scheme is to set up an SPV under the MoF where the SPV will raise RM6.2 billion via debt issuance to acquire the toll concession. The self-financing takeover will be able to service its debt via congestion charges based on travelling time.
As the government’s proposed takeover is deemed fair by the market, that is a valuation based on a discounted cash flow, and Gamuda’s board of directors has accepted the offer by the MoF to take over its concession-holdings companies valued at RM2.36 billion, based on Gamuda’s equity stake. While a further deliberation for the toll takeover is needed during the upcoming Cabinet meeting and an announcement is expected by today, we understand the proposed toll acquisition has the prime minister’s backing. Separately, we opined that Gamuda may not accept Khazanah’s offer — RM600 million lower than the MoF’s offer — if the MoF retracts its previous offer. — UOB Kay Hian, Aug 20