BY UNA GALANI
Malaysia faces many hurdles in the upcoming $3 billion initial public offering of its sovereign investment vehicle. 1Malaysia Development Berhad has become a political target for the nation’s opposition after making some poor decisions. Amid the noise, the state fund will have to work hard to interest investors in its energy assets.
The six-year old fund, which counts Prime Minister Najib Razak as an adviser, focuses on strategic investments in property and power. Since 2012, it has spent over 12 billion ringgit ($3.6 billion) acquiring coal and gas-fired power plants in five countries including Bangladesh, Egypt, and Pakistan. Today, 1MDB is Malaysia’s second-largest independent power producer.
Aside from a government guarantee for a fifth of its net debt, 1MDB raises and invests its own capital. Net debt stood at 66 percent of total assets at March 2013. A listing of the energy assets – one of the country’s largest initial public offerings – will help pay down debt and fund new growth.
The problem is that 1MDB has acquired a poor reputation along the way. Rapid expansion prompted it to overpay for energy assets, resulting in a $357 million goodwill writedown during the financial year ended in March 2013. That’s equivalent to 11 percent of what it paid for two acquisitions over the same period. It is expected to take further impairments ahead of a listing.
Two bond issues which raised a total of $4.75 billion in 2012 and 2013 have also proved controversial. 1MDB paid Goldman Sachs unusually high fees and commissions ranging between 9 and 11 percent for the funds. In the absence of a proper explanation, the deals look like poor judgment.
Reducing the state’s shareholding in the energy business to around 20 percent may help to insulate it from some of the criticism from the government’s political opponents. The newish senior management team should also ensure the unit begins to act more like a commercial entity. The business plans to double its net power generation capacity, from around 6,000 megawatts today, within a decade.
Nevertheless, investors in the initial public offering will want assurances the energy business will be better managed in the future than its parent has been in the past.
First published Nov. 6, 2014
(Image: REUTERS/David Loh)