Tuesday November 16, 2010
Proposals by Time dotcom signals important milestone to turn around GLCs
Raison D'etre - Risen Jayaseelan
On the face of it, the deal does raise eyebrows. First, it a very big related-party transaction (RPT) and second, why is an individual being given control over an important GLC?
But a closer look indicates that there is not much to fret about. First, the RPT is fully disclosed and all interested parties in the deal, which include Afzal and Khazanah Nasional Bhd, aren’t going to vote on the deal, leaving the decision on whether to accept or reject the proposals entirely in the hands of the minority shareholders.
Second, is the question of whether the assets are being injected at a fair price.
Afzal said UBS Securities Malaysia was particularly picked by TdC’s board to advise on the deal as UBS has had a lot of experience in valuing assets such as data centres and submarine cables.
It is also understood that the replacement cost of the submarine cables is much higher than what TdC is paying for. (To recap, one of the companies TdC is buying owns a 10% interest in the trans-Pacific Unity North Cable system, which is a 9,620km Japan-US cable built together with Google, Bharti, KDDI, SingTel and Pacnet.)
But perhaps, most significant aspect of the deal is this: Afzal did not parachute into this deal from nowhere. He has been given the reins to run TdC since October 2008 and has been doing a pretty decent job at it. TdC used to be known as a company whose revenue and profits were erratic and interspersed with asset disposals and impairment exercises that left investors with little visibility of the future earnings of the company.
But since 2009, TdC has been consistently EBITDA (earnings before interest, tax, depreciation and amortisation) positive, has had strong operations cashflows and has had five consecutive quarters of revenue and earnings growth. TdC’s EBITDA and operating profit margin have also doubled in the first half of FY2010. Afzal says 2009 was a year of ‘detox and cleansing’, whereby the cash was conserved, processes re-engineered and the quality of their fibre optic networks – the core of their business – were improved.
A closer look at the deal also reveals that Afzal & Co are being paid for their assets largely in shares in TdC. The cash that TdC is paying out goes mainly to other shareholders of the assets, namely three private equity funds, which had pumped in the initial capital needed to part finance the construction of the submarine cable. This clearly indicates that Afzal and his team are in for the long run at TdC.
Minority shareholders, therefore, should consider these facts when it’s time to vote on this deal.
If this model works out – if Afzal and team do bring value to TdC – then it does set a good precedent for Khazanah and other government agencies on how to deal with valuable assets in their hands which are not reaching their full potential.
To be sure, it does seem that this is the model that Khazanah is also trying to follow for POS Malaysia Bhd. Alas, in that case, it does seem to be taking longer than expected. While bids have been submitted by various parties on their plans to take POS to the next level, little has been heard of the deal since. It is rumoured that one stumbling block remains to be the unwillingness of the Government to give up its powerful golden share. Hopefully, that problem will be sorted out over time.
·Deputy news editor Risen Jayaseelan reckons that the TdC example is a big improvement from the past where assets and licenses were dished out to certain connected individuals who didn’t increase the value of those assets or worse, flipped them to other parties at a profit.
