From The Far Eastern Economic Review Issue cover-dated 21st December 2000

A Question of Honour

Renong Group Chairman Halim Saad wins a postponement of a purchase of shares he is committed to buy. The markets are appalled

By S. Jayasankaran/KUALA LUMPUR

FOR MUCH OF HIS tenure as chairman of Renong, a politically well-connected conglomerate, Halim Saad has been the poster boy of Malaysian business. Courted by bankers, he borrowed large sums to finance rapid growth. In turn, Renong helped build modern Malaysia: roads, bridges, stadiums and fibre-optic networks. Renong and other companies in the real-estate, construction and finance group were key stocks in investors' Malaysian portfolios.

Lately, however, Halim the poster boy has become Halim the problem child.

That was starkly illustrated on December 12, when the share prices of Renong and a key affiliate tumbled as Halim bought extra time to keep a three-year-old financial commitment. The stock slide will make it even more difficult for Halim to restructure Renong's huge debts and pursue his plan to transform the parent company into a telecoms and e-commerce play.

Halim's fall from grace began with the Asian Crisis, which left Renong vulnerable to its high debt, and a share sale in November 1997 that caused outrage among investors. In the transaction, a group affiliate company borrowed money to buy a 32% stake in Renong. Halim denies he was the seller. But, responding to complaints that shareholders' rights had been trampled, he later promised to buy the shares personally in three years' time.

Ever since, investors have been watching to see whether he would make good on his pledge.

They got part of the answer on December 11, when it was announced that Halim would not, after all, make a payment in February of 3.1 billion ringgit ($815 million) to the affiliate, United Engineers Malaysia. Instead, he will pay just 300 million ringgit next year and the balance by May 2002. Stock investors weren't impressed. Renong's shares fell 13% and UEM's 11% on December 12.

The case has become a cause c?l?bre in Malaysia because it's seen as a test of corporate governance in a country where the rights of minority shareholders are often ignored. It also raises broader issues about Malaysia's desirability as an investment destination, and the government's support of certain businessmen. Halim is a favourite of Prime Minister Mahathir Mohamad, and Renong has been closely linked with Mahathir's party, the United Malays National Organization, or Umno. Government assistance is widely seen as having helped both Halim and Renong survive their financial problems.

"To Mahathir, Halim is like Proton," says a Malay businessman, referring to the national car, another favourite of the premier. "That's why he cannot be allowed to fail."

Just as important, the Renong group's total debt is over 25 billion ringgit, or 5% of all corporate lending by Malaysia's banks. Halim has also been one of the biggest beneficiaries of Malaysia's affirmative-action policies in business, designed to create a class of Malay entrepreneurs equal to the ethnic-Chinese businessmen who dominate the economy.

To outsiders, the whole affair smacks of cronyism. "There is a lot of concern," says Manu Bhaskaran, managing director of SG Securities in Singapore. If Halim doesn't make good on his promise to UEM, he says, "it will become even more difficult to sell Malaysia" to international investors.

In the controversial 1997 deal, United Engineers Malaysia borrowed over 2 billion ringgit ($526 million) to fund its stock purchase. UEM was a profitable infrastructure company and favourite of institutions investing retirement funds. Investors saw the deal as a bailout of the sellers--whoever they were. Renong's and UEM's share prices collapsed, and the Kuala Lumpur Stock Exchange's composite index fell 20% in a week.

In February 1998, Halim responded to the outcry by offering UEM a put option on the shares, pledging to buy them in three years' time at cost plus interest. That now comes to 3.1 billion ringgit, or almost 4.40 ringgit a share--more than three times the current price of Renong stock.

All along, however, he has maintained he wasn't responsible for the original sale. In a recent interview with the REVIEW he said: "The shares weren't mine, they weren't my friends', and they weren't Umno's. I have agreed to take the burden off UEM because it's the honourable thing to do."

He agrees that the government continues to aid Renong, but is unapologetic. "Yes, the government's helped. But our creditors will get paid 100% with interest and with no haircuts. What's wrong with that?"

On December 11, UEM announced it had accepted Halim's new offer. UEM Managing Director Ramli Mohamad conceded that Halim may have failed to keep his original promise "in spirit," but added: "If he hadn't made the offer, UEM would have nowhere to go. So let's give him a chance."

Halim says he's serious about buying back the shares but admits it's difficult to raise funds, given Renong's weak share price. In separate remarks on December 12, he told the REVIEW: "Why should I pay 300 million in interest if I wasn't serious?" he asks. "I might as well put it in my pocket and go away to Paris."

All the same, the latest twist won't help Halim as he tries to restructure Renong's huge debts. Already, this has involved a complex series of asset shuffles.

In 1998, Halim retired 8.4 billion ringgit of joint Renong-UEM debt by getting Plus, a UEM subsidiary that owns and operates Malaysia's north-south toll road, to issue 17 billion ringgit-worth of seven-year bonds. Although the debt was on Plus's books, Renong and UEM undertook to service large chunks of it. All Renong's assets were pledged to Plus and the government extended Plus's concession on the toll road by 12 years. It also leaned on banks and government agencies to buy the bonds.

Then, in April this year, Halim proposed asset sales and corporate listings, including a flotation of Plus, designed to retire over 12 billion ringgit of group debt by 2001 and yield a cash surplus. He also proposed retiring some of Plus's bonds to give it a better listing valuation.

But then Halim changed tack, shuffling assets yet again. In late November, UEM proposed buying all Renong's assets--except its 37% stake in UEM--for 6.7 billion ringgit using new UEM shares and commercial paper. UEM would then sell most of these assets and take over Plus bonds that Renong had intended to service. The markets reacted badly, fearing the UEM was undertaking more risk and and that its earnings per share would be diluted. "All we see are assets being shuffled around," says SG's Bhaskaran. "But where is the cash being generated?"

Halim says the deal aims to enhance Plus's listing valuation. Without it, he says, the valuation would have to be discounted to reflect the fact that Plus's bonds are backed by assets that aren't owned by its parent, UEM, but by group parent Renong. "Once the assets are owned by UEM, it can guarantee the risk and Plus will get a higher valuation on listing," Halim says.

UEM says most of the assets it acquires will come debt-free and that a condition of the deal is that UEM cannot suffer dilutions in either earnings or asset values.

Is that really the case? On the one hand, Halim has now deferred the put option that would have helped to restore UEM's balance sheet. On the other hand, and more positively, UEM on December 11 baulked at buying two of Renong's assets, most notably a loss-making light-rail transit system with over 4 billion ringgit in debt. This refusal reduced the value of the overall transaction from the 6.7 billion ringgit price proposed in November to 5.4 billion ringgit.

But much will depend on actual asset sales. Given Halim's political cachet, some observers think he will eventually succeed in turning Renong around. One reason is his sheer stubbornness in maintaining that he can raise gargantuan sums. (Apart from the buy-back of Renong shares from UEM, he has also agreed to buy a 22% block of Renong shares from another group unit for almost 900 million ringgit.)

There's also a belief that the government won't let Halim down. When Mahathir blocked Singapore Telecommunications' 2.2-billion-ringgit bid to buy 30% of Renong's telecom unit earlier this year, he replaced SingTel with Khazanah, a federal government agency. Khazanah's purchase of the stake ensured a successful underwriting of the telecom company's shares, guaranteeing a value of more than 8 billion ringgit when the shares are listed early next year.

Halim-watchers say the government cares about him because he has built visible structures such as highways and bridges and has done it with quality and speed. Although Plus bust its budget on the north-south highway project, it finished nine months ahead of schedule and the road has slashed travelling times.

If the latest transactions go ahead as planned, Halim will own 70% of Renong which, in turn, owns 54% of UEM. And then? Some analysts speculate that after UEM has sold some assets and listed others, its shares could fetch a premium. Then Halim might move to take Renong private, liquidate it and distribute its assets--which by then will consist solely of UEM shares--back to himself. So he may yet emerge the winner.

"It's tempting but too expensive," counters Halim. "It would cost me two arms and two legs."

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From The Far Eastern Economic Review
Issue cover-dated 21st December 2000

HALIM'S FALL: DOWN BUT NOT OUT

By S. Jayasankaran

In 1986, the Malaysian government awarded a company linked to the ruling United Malays National Organization the right to build and operate the North-South Highway--billed as the country's largest private-sector project at the time.

The opposition tried to block the move, citing a conflict of interest. But Halim Saad, who emerged as Umno's nominee in the highway company, won in court. The New Zealand-trained accountant and protégé of Daim Zainuddin, the finance minister then and now, later bought the company and built the highway. He leveraged that asset to buy Umno's other businesses to create what is now the Renong group.

The cigar-puffing, designer-suited tycoon looms large in Malaysia. If the country's new heroes in the 1990's were corporate barons, Halim was Superman. His was the lifestyle of the rich and famous, complete with a private jet. And the boyish-looking tycoon seemed like the businessman to emulate: He always delivered projects on schedule and financed them with private funds. At its height in 1997, his empire was valued at 40 billion ringgit ($10.5 billion).

But the Asian Crisis laid bare the folly of his overly ambitious empire-building. "His problem was that he didn't know when to slow down," says a close associate. Critics accused him of imprudence, especially for using short-term loans to fund long-term projects.

The severity of the crisis didn't help. In 1997, Renong alone had debts of 2 billion ringgit against assets of 18 billion ringgit. The crash altered those figures to 4.5 billion ringgit of debt against 4 billion ringgit of assets. "We'd have been fine if not for the plunge in securities' value," Halim says. Perhaps, but the whole Renong empire, with its stakes in everything from banking to telecoms, has a debt of over 25 billion ringgit.

And unlike smaller businessmen, Halim, 47, hasn't yet had to pay for his mistakes. Thanks to government help, there have been no share-capital reductions for him nor haircuts for his bankers. Still, the embattled tycoon thinks he's much maligned and has revenge on mind.

"I will pay all my debts, Inshallah," he says. "And I will prove all of you wrong."

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