Malaysia bids $1B for UEM

Mahathir is thought to be directing the government's takeover of UEM

By CNN's Alex Frew McMillan

KUALA LUMPUR, Malaysia -- The Malaysian government launched a bid Monday that could see it take control of the country's largest conglomerate.

The government offered $1.0 billion (3.7 billion ringgit) for United Engineers Malaysia Bhd. (UEM), the country's largest construction company.

UEM is the key company in the Renong group. Buying UEM would make the government the largest shareholder in Renong Bhd.

It could also signal the departure of Renong's chairman, Halim Saad, who would lose control of Renong after 11 years in charge.

But one analyst warned that the offer for UEM was not high enough to win over investors.

The country's biggest borrower

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The Renong group conglomerate spans 15 companies in numerous industries, including oil, banks, transport, telecommunications and property.

The government wants to clean up Renong and reduce its massive debt burden. It owes $3.4 billion (13 billion ringgit), making it Malaysia's biggest private borrower. It racked up huge debts in the Asian financial crisis.

Like many Asian conglomerates, Renong has a complicated structure of companies that own part of each other. It owns 37.1 of UEM, which owns 32.6 percent of Renong.

Halim is executive chairman of Renong, but he owns just 16.5 percent. So buying UEM would effectively give the government control of the Renong group, too.

There is speculation Halim would then step down. He resigned a position on UEM's board in June.

Halim, 47, is a protégé of former finance minister Daim Zainuddin. But Daim resigned last month after falling out of favor with Prime Minister Mahathir Mohamad.

Investors have cheered the idea that a government takeover of Renong might signal the end of favoritism for the politically well-connected in Malaysian business.

Offer of $1.18 per share "not enough"

Instead of bailing Renong out, the government is trying to take it over. Mahathir is thought to be directing the takeover personally.

Malaysia made the offer for UEM via a subsidiary of its investment arm, Khazanah Nasional Bhd. That subsidiary, Syarikat Danasaham, was specially set up in 1999 as a takeover vehicle.

Khazanah offered $1.18 (4.50 ringgit) per UEM share on Monday, and 11 cents (40 Malaysian cents) for every warrant.

It said it wants to buy all of UEM and take the public company off the stock exchange, or "delist" it. If it wins over 90 percent of the investors, it can forcibly buy out the rest and delist UEM.

But Uday Jayaram, senior investment analyst at ING Barings in Kuala Lumpur, said the offer is not good enough. UEM's fundamental value is between 8 and 9 ringgit per share, he said.

"The government does want to send the message that the day of bailouts is over," Jayaram said. But the 26 percent premium over Tuesday's close is not enough to reward shareholders who have held UEM stock for years.

"You have this opportunity to give them some value for the ownership of these shares. That's not being done," he said.

Shared cost

Ultimately, the government, UEM's shareholders and its creditors will likely have to share the cost of helping Renong restructure.

But taking UEM "doesn't solve anything for the market as a whole, and it doesn't solve anything for minority shareholders," Jayaram said.

The government has 35 days to get an official offer to UEM's board and shareholders, or to make any changes in what's now a preliminary bid.

UEM's investors will then have three weeks to decide whether to accept.

To complicate matters, Halim owes UEM 3.2 billion ringgit, after failing to come through on a 1998 commitment to buy stock. He has so far not paid the debt after getting a 60-day extension in July.

UEM's managing director, Ramli Mohamad, is expected to quit, according to local media.

Trading in the stocks of both Renong and UEM was halted again Monday. They were frozen last Tuesday, ahead of Monday's announcement.