http://www.feer.com/2001/0108_09/p042money.html

Debts, Daim And Downturn

Since a government bid to take over Renong, investors have been wondering which company will be next. Here's why MRCB could be a target

By S. Jayasankaran/KUALA LUMPUR

Issue cover-dated August 09, 2001

MALAYSIAN RESOURCES, or MRCB, waxed fat on political connections during the booming 1990s. Now its future is uncertain in the wake of a proposed government takeover of the Renong conglomerate last month. MRCB isn't as indebted as Renong but it's still a target for two reasons: its controlling shareholder's links to former Finance Minister Daim Zainuddin and its debt to a state pension fund.

The man to watch in MRCB is Abdul Rahman Maidin, who owns 25% of MRCB through a private company, Realmild. Former MRCB executives say that Realmild owes 600 million-700 million ringgit ($158 million-184 million), mostly to the Employees Provident Fund, a state-owned pension plan. These debts and Rahman's connections to Daim make MRCB a potential takeover target, as the government moves to reassure financial markets that order will prevail.

Renong was also hugely indebted to the state, and its takeover was mooted on July 23 after months of growing impatience with the company's failure to restructure, a factor that dampened market sentiment. The 3.8 billion ringgit bid is a belated signal to financial markets that this sort of shilly-shallying will no longer be tolerated. Indeed, the state's proposed takeover of Renong and its implicit ouster of Renong chieftain Halim Saad, another Daim protégé, was broadly welcomed by the markets and has triggered a spate of mergers and acquisitions in Malaysia.

MRCB is in a much better financial position than Renong but its political backers have always tended to fall foul of Prime Minister Mahathir Mohamad. And the involvement of the EPF is always a politically touchy issue. Indeed, even Mahathir felt the need to reassure the unions early this year that EPF funds would not be misused. And the EPF has invested much in MRCB. Quite apart from the loan to Realmild, it owns 12% of MRCB.

The MRCB saga vividly illustrates the nexus between business and politics in Malaysia, a tale of how huge fortunes were created by a stroke of a ministerial pen. It also demonstrates the pitfalls facing businesses caught on the wrong side of the political divide.

The group was always considered politically valuable because it controlled two key media companies considered essential to influence voters: the newspaper publisher New Straits Times Press, or NSTP, and television broadcaster Sistem Televisyen Malaysia, or TV3.

MRCB's prominence dates back to 1993 when then Finance Minister Anwar Ibrahim engineered a buyout of both companies from Renong. Like Daim before him, Anwar wanted his own group of business allies. His "boys" were four NSTP executives led by Nazri Abdullah, then editor of a major Malay-language newspaper. The four set up Realmild, which proposed to buy both NSTP and TV3 for 600 million ringgit. Renong wasn't particularly enthusiastic but Anwar, then considered Mahathir's anointed successor, prevailed.

Financial executives say the four didn't have to do much. Another Anwar business ally, Quek Leng Chan, head of the Hong Leong conglomerate, provided advice, financing and a vehicle: he owned MRCB. Through Quek, Realmild was lent 267 million ringgit to buy MRCB on the basis of political faith alone. The latter then used new shares and borrowings to purchase the media companies.

Within months MRCB became an investor favourite, with its stock price rising from 1.8 ringgit to 12 ringgit. And Anwar did MRCB proud, with large public-works projects, a telecommunications licence, two of Malaysia's largest power generators, lucrative transmission contracts and a 5 billion ringgit concession to build a railway hub in downtown Kuala Lumpur.

In those heady days of overweening optimism, even the failures hardly seemed to matter. In June 1996, for example, national phone utility Telekom Malaysia paid 640 million ringgit to take over Emartel, MRCB's loss-making mobile-phone company. And while MRCB piled on debt to take on bigger and bigger projects, the ex-MRCB officials say that by selling down its holding, Realmild completely cleared its 267 million ringgit debt load by late 1996.

But an error by Realmild in early 1997 is now coming back to haunt it. Back then, MRCB paid almost 1.5 billion ringgit for a 27% stake in diversified financial-services company Rashid Hussain. The central bank then decreed that as a shareholder in a bank, Realmild would have to take a larger stake in MRCB. To take up those new shares, Realmild borrowed 500 million ringgit from the EPF.

Then the Asian Crisis struck. Share prices plummeted, Anwar fell from grace and MRCB was caught with more than 2 billion ringgit in debt. Nazri's team was forced to exit in 1999. According to a senior official of the ruling United Malays National Organization, or Umno, Daim, then the new finance minister, searched for a new shareholder. He offered the stake to Kadir Jasin, one of the Realmild four who remained close to him, and to Razali Ismail, a former Malaysian ambassador.

But he settled on Rahman, then little known outside Penang. On paper, Rahman owns all but one share of Realmild's 7.1 million ringgit in equity. But it isn't clear if he really owns MRCB. Anwar said from jail in 1998 that a large chunk of MRCB's equity was held in trust for Umno. Rahman declined to respond to an interview request from the REVIEW. According to Umno officials, Mahathir himself brought up the question of MRCB's ownership in a meeting with chief ministers in late June. "No one knows who owns what," says a senior Umno official. "I think there is going to be an accounting."

In spite of the uncertainty about the future, financial analysts say that Rahman has been serious about tackling debt, and has taken huge hits in the process. So far, he has sold off the power projects and MRCB's stake in Rashid Hussain, raising more than 1.2 billion ringgit. Now MRCB has pruned debt to 800 million ringgit. Most of those funds are owed by its rail-development project, Sentral.

Meanwhile, MRCB still owns NSTP--which is financially stretched and running at a loss--and a stake in TV3, which is insolvent and in the throes of a capital reduction. NSTP is expected to be sold next, with Munir Majid, a former banker and regulator, strongly tipped to take it over. Most analysts doubt if Realmild's debt to the EPF has been serviced, given that dividend payouts from MRCB's companies are likely to have been negligible. Even though MRCB has been pared down radically, it will continue to be vulnerable until Realmild's problems are addressed.