http://www.theedgedaily.com/article.cfm?id=6117

The Edge Weekly : Opinions

Question Time: Should Halim take Renong and UEM private?

P Gunasegaram

If indeed Tan Sri Halim Saad is going to make a bid to privatise Renong Bhd and United Engineers (M) in the hope that he can avoid paying his RM3.2 billion debt to UEM, it would be heaping insult upon the injury that UEM minority shareholders have suffered.

And it will be incumbent upon the UEM board to ensure that if indeed Halim has the resources of over RM2 billion to mount such a bid, he should pay up his obligation to UEM first. If he sticks to his promise to buy UEM's 32 per cent stake in Renong for RM3.2 billion and pay up the cash, UEM's share price may double or even triple.

UEM was a strong, viable company grounded in a solid infrastructure project -- the North-South Expressway (PLUS). But it has been brought to its knees by repeated attempts to use it as a vehicle to rescue the Renong group, often at considerable expense to UEM minority shareholders.

The sequence of events is instructive: Last December, Halim offered, and received, a quick acceptance by the UEM board of what amounts to a postponement of the payment of RM3.2 billion under a put option to purchase Renong shares that UEM had accumulated. In the process, he may have written himself into the record books as the individual to owe the highest unsecured debt -- a whopping RM3.2 billion -- to a public-listed company in Malaysia.

In bestowing this dubious distinction upon Halim, the UEM board had opened itself up to further questions after a series of questionable actions taken, dating back to the dark days of 1997 when it quietly built up a stake of over 32 per cent in its controlling shareholder, Renong, borrowing more than RM2 billion in the process.

This was puzzling from a business point of view because UEM was then entrenched in the infrastructure business and stood to gain nothing but additional risk and higher borrowings from the purchase.

And it was extremely enigmatic, too, because the identities of the sellers of the Renong shares remained a mystery -- if one totalled up the Renong shares traded in the market during the relevant period, it still fell far short of the shares amassed by UEM. So whom did UEM buy the Renong shares from? And why?

When the news leaked out, investors wrung their hands in despair and then voted with their feet, selling UEM and Renong share prices down to a fraction of their values. The broad market was not spared either as investors expected that other companies might be similarly disadvantaged in efforts to save their major shareholders.

Reacting to investors' fury, Halim, despite having no legal obligation and disavowing responsibility for UEM's purchase of Renong, gave UEM a put option that bestowed on the company the right, but not the obligation, to force him to buy the 32 per cent Renong stake at RM3.24 a share plus holding costs. This would have amounted to RM3.2 billion as at February 2001, when the obligation became due.

But buying that stake was not the end. The lessons were not learnt. The UEM board went on to make more questionable decisions, including the following:

* It pledged the assets and collateral of its highway operator subsidiary, PLUS, to issue over RM8 billion worth of bonds to sort out the Renong group's debt woes; and

* It agreed to buy over RM4 billion in assets from Renong, largely in exchange for its own shares in a deal that directly exposed it to Renong's risky assets.

The last round of proposed asset purchase and the extension to Halim resulted in yet another rout of UEM's share price, which has lost about half of its value since the announcements. It is currently trading at around RM3, just a quarter of its high last year of over RM11. This reflects a massive erosion of investor confidence in UEM and 75 per cent destruction in shareholder value!

UEM permitted Halim a favourable payment scheme that effectively gave him an extension of a year to pay his obligations under the put option. Instead of paying the full amount in February, he paid an initial RM100 million to be followed by two further payments of the same amount before full repayment of all outstanding sums next February.

Why did UEM give Halim this extension? Because he did not have the money to pay his obligations, said UEM's managing director at a briefing for the press and analysts at the time of the extension last year.

One sharp analyst then asked how Halim, if he did not have any money, was going to pay for the proposed purchase of a 21 per cent stake in Renong from Time Engineering for some RM875 million. The UEM managing director did not seem to have a satisfactory answer to this. And the managing director was not even sure if the final repayment would be in cash.

Halim owes UEM RM3.2 billion. The amount will continue to rise by a compounded rate of almost 10 per cent, or RM320 million a year. If he can only pay RM100 million in February, only 3.0 per cent of the outstanding amount, how will he repay the full amount in a year's time? Shouldn't the UEM board ascertain if he has the resources to repay the debt?

Shouldn't they have tried to get him to pay at least half, even a quarter of his obligations first? Perhaps he could have paid UEM the RM875 million that he had offered to pay Time Engineering for its 21 per cent stake in Renong. Why should he spend money increasing his stake in Renong from other sources when he cannot even pay for and take over UEM's 32 per cent stake as contracted?

Shouldn't the UEM board at the very least have secured whatever resources (assets, future cash flow) Halim had so that UEM will get these in the event of default by Halim?

And it will be an utter travesty of justice and of minority shareholders' interest if he is permitted to mount a bid to take UEM private to avoid paying up his RM3.2 billion debt to the company. The authorities should take to any such move unkindly.