Source: The Asian Wall Street Journal 21st December 2000

Heard In Malaysia: Faith In Market Hinges On Control

By CRIS PRYSTAY Staff Reporter

KUALA LUMPUR -- Could the sale of stakes in Malaysia's national airline and car company entice foreign investors to take another look at Kuala Lumpur's flagging stock market? It all depends on how much control the buyers end up getting.

If the two potential deals end up going ahead, analysts say, it could mark a turning point for investors, who have been repelled by bailouts of well-connected businessmen and the slow pace of meaningful corporate restructuring.

Analysts are divided, but most believe the government's intention to sell stakes in these two long-protected, politically strategic assets could help Malaysia begin to remake its image -- that is, if the sale is done in a convincing way. The key issue, they say, is how much management control outside investors would have in either Malaysian Airline System or the long-protected national car maker, Perusahaan Otomobil Nasional, known as Proton.

Some investors are optimistic. "There is a strong signaling factor that can't be discounted with these two events," says Chong Yoon Chou, fund manager at Aberdeen Asset Management. "It's important now because there's a beauty parade across Asia's markets, and marks go to restructuring, corporate governance and transparency."

Prime Minister Mahathir Mohamed has indicated that the government, which is in the process of buying out businessman Tajudin Ramli's 29% stake in ailing MAS, might be willing to give up it's "golden share" in the national carrier, which allows it to veto major policy decisions. Dr. Mahathir has also conceded that Proton needs a foreign investor if it is to compete in the global auto market. Both Swissair and Qantas have since confirmed they are in talks with MAS, and U.S. car maker Ford Motor is reported to have made overtures to Proton.

What's turned investors off is that most corporate restructurings to date have involved only rescheduling of debt, with little or no change in management or corporate focus. The failure of Renong Group to address its debt problems last week only added to the deepening cynicism about Kuala Lumpur's stock market. Renong affiliate UEM granted the group's chairman a 15-month extension to honor his pledge to buy back a large block of Renong shares from UEM. The decision by UEM in 1997 to take on debt in order to buy a 33% stake in Renong, which has historical links to the country's dominant political party, was widely seen as a bailout of the ailing parent company at the expense of UEM.

For some wary observers, even sales of a few strategic assets won't be enough to signal that broader reforms are really under way in Malaysia. "Maybe Proton and MAS can entice some strategic investors, but at the end of the day investors still have other, lingering concerns. It's these questionable domestic deals. It's clear the government is reverting back to old habits where capital is allocated to friends," says Ray Jovanovich, a fund manager at Indocam Asset Management.

Meanwhile, the country's stock market has all but fallen off the map. Malaysia's central bank reports that between May and December, foreign portfolio investors had taken $2.6 billion out of the country, where the total market cap now stands at just $112.8 billion.

Investors who are watching the two deals say they will reserve judgement until it is made clear how much management clout an outside investor would be able to wield at either Proton or MAS. The government hasn't indicated how much management control Malaysia would be willing to cede in either the airline or the car maker.

"Political considerations have superseded commercial priorities, for both Proton and MAS; I'm not sure how much that will change," says an analyst at a foreign brokerage house. MAS, which reported a loss of 258 million ringgit ($67.9 million) in the year ending March 2000, and a loss of 700 million ringgit in 1999, hasn't been able to raise its domestic airfares for the last eight years. The airline incurs about 360 million ringgit in losses a year on its domestic routes.

It is likely the government will find it even tougher to loosen its grip on the national car project, held up by Prime Minister Mahathir's government as both a key prong of its industrialization policy and a source of national pride. The brainchild of Dr. Mahathir, Proton is protected from competition by stiff import tariffs that make a typical foreign family car almost twice as expensive here as in neighboring Thailand. Sadly for some prospective owners, Dr. Mahathir has said that not more than 30% of Proton would go to foreigners.

Still, some investors contend that letting go of even a piece of a prized project like Proton is enough. "Even if they sell 20% or 30%, that's something; it counts. Even that sends a very strong signal. It's important as a sign that Malaysia is moving ahead," says Mr. Chou at Aberdeen.

http://interactive.wsj.com/

Subject: BTS : Malaysian govt buys back MAS stake at 120% premium

From The Business Times, Singapore
21st December 2000

KL govt buys back MAS stake at 120% premium

Price for national airline works out to RM8 per share compared with market price of RM3.62

By Eddie Toh in Kuala Lumpur

THE Malaysian government has thrown a lifeline to tycoon Tajudin Ramli of Malaysia Airlines by agreeing to pay a hefty market premium of 120 per cent for his stake in the money-losing national carrier.

Mr Tajudin's Naluri Bhd yesterday struck a deal to sell its entire 29.09 per cent in MAS back to the government for RM1.79 billion (S$817 million) in cash. The price tag works out to RM8 a share, 120 per cent higher than MAS's market price of RM3.62 yesterday.

The "re-nationalisation" of the privatised airline did not come as a surprise as cash-strapped Naluri had earlier announced its plan to sell the shares back to the government.

However, analysts felt the government should not have given in to Mr Tajudin, whose asking price of RM8 is also his cost of buying the stake in 1994.

Analysts have valued MAS at between RM4 and RM7 per share.

Naluri itself said the government would be paying a premium of 91.2 per cent over the consolidated net tangible assets of MAS as at the close of the financial year ended March 2000. Naluri did not spell out the basis for the premium, beyond saying that it was a "strategic and controlling block" of shares.

Nor did it say if the buyer, the Ministry of Finance, headed by Daim Zainuddin, has sought the advice of an independent valuer for the deal. The sale of the strategic stake to the finance ministry is expected to be a stop-gap measure.

The Malaysian government is expected to sell part of the stake to a foreign carrier to help turn MAS around. SwissAir and Qantas Airways are the two main contenders for the stake in MAS but negotiations have been protracted.

Although the national carrier is no longer a government entity, the Malaysian government still owns a golden share that carries wide-ranging veto power over the management and direction of MAS.

Analysts said that the two foreign parties were not likely to pay more than RM8 per share for a strategic stake in the carrier. This means that the government may incur a loss in buying the stake from Naluri, which is 47 per cent owned by Mr Tajudin. Naluri will use the proceeds to settle its entire debt of RM1 billion although it will incur a small loss of RM26.9 million from the sale of the MAS stake.

"The proposed disposal is timely for Naluri after taking into consideration Naluri's debt situation and that Naluri is not in the position to provide financial resources to further invest in the national carrier," Naluri said yesterday.

While the deal will render Naluri debt-free, MAS is still grappling with debts of RM9.4 billion. And MAS has yet to turn around after two straight years of losses amounting to RM1 billion.

http://business-times.asia1.com.sg

http://www.lycos-asia.com/my/asia/malaysia/001221091945.pcd3xrp2.html

Malaysia Airlines boss denies government bailout

KUALA LUMPUR, Dec 21 (AFP) - 17:19 - A businessman who is selling his stake in loss-making Malaysia Airlines to the government for more than double its current market value denied on Thursday he had received a bailout.

Naluri Bhd, a company controlled by Tajudin Ramli, announced Wednesday it had signed a deal to sell its 29.09 percent stake for 1.792 billion ringgit (471 million dollars), or eight ringgit a share.

Malaysia Airlines shares were at 3.64 at the close of morning trade Thursday.

The government is widely expected to sell all or part of the stake to a foreign airline to raise capital and attract expertise. Swissair and Australia's Qantas have expressed interest.

Tajudin, the airline's executive chairman, was speaking in an interview with AFX-Asia, an AFP-owned financial newswire.

Tajudin bought the stake from the central bank in 1994 at eight ringgit, double the then-market price.

He said the government now is paying a "fair" price, adding that the airline's revenue has doubled to close to eight billion ringgit since he took over.

"So to me, that is not a bailout at all," he added.

"You cannot look at it from the point of view of the stock market only. You have to work on the airline's value ... the price paid is fair."

Retracing the events that led to steep losses during the Asian financial crisis, Tajudin said he had held talks with the government about the effects of the ringgit peg on its dollar borrowings and fuel needs.

The government fixed the ringgit at 3.80 to the dollar in September 1998, a rate which is now widely seen as undervalued.

Malaysia Airlines recorded a net profit of 318.892 million in the year to March 1997 before the crisis struck but has posted hefty losses since then.

In the year to March this year it recorded a net loss of 258.57 million ringgit.

One of the airline's main concerns is its policy of not hedging its fuel requirement but Tajudin said there are restrictions that are beyond its control.

Malaysia Airlines also had to depend on overseas markets to fund its purchase of aircraft as the amounts are too large for local markets.

"If I borrow from the Malaysian markets -- bonds or banks -- it will dry up all the money in the country. We had to borrow overseas but the crisis came in and the ringgit was pegged at 3.80, so we were (caught)," he said.

In addition, as only 20 percent of revenue was in dollars at that time, the loans could not be adequately financed, he added.

The airline has also had to fly some unprofitable routes as a result of government-to-government agreements, which Tajudin said has been costly.

Asked if he had a free hand in managing the airline, Tajudin said there are constant "consultations" with the government concerning developments.

He denied mismanagement and said Malaysia Airlines became a loss-maker as a direct result of the financial crisis.