[Updated] Over priced Deal? Malaysia’s FGV’s buys 37% in Rajawali Group’s EHP for $680m

Visual from the FGV social media page

The world’s largest crude palm oil producer Felda Global Ventures Holdings Bhd (FGV) is acquiring a 37 per cent stake in Indonesia’s PT Eagle High Plantations (EHP) for $680 million in cash and shares, the Indonesian company’s majority shareholder Rajawali Group revealed in a statement.

The deal includes 95 per cent of the conglomerate Rajawali’s sugar plantations, the company said in a statement in Jakarta last Friday.

Under the proposed acquisition, FGV will pay $632 million (MYR2.37 billion) in cash for 30 per cent and 95 million new FGV shares for the remaining 7 per cent stake.

Rajawali’s managing director Darjoto Setyawan said it was seeking to sell an 18.5 per cent stake in Eagle High.

EHP is engaged in plantation development, agriculture, trading and refinement of plantation products. Its products consist of refined palm products such as crude palm oil and palm kernel.

FGV said in a stock filing that the acquisitions are in line with its plan to transform the group into one of the largest integrated plantation companies globally, through increasing land bank, improved age profile of crops, potential cost reductions and strategic long-term partnership with Rajawali Corpora.

Both companies said the deal would combine FGV’s downstream capabilities with EHP’s land bank and reduce operating costs.

Rajawali Group said in a statement that the cross-border deal underlines “Rajawali Group’s long-term investment in the agricultural sector and gives equity participation in the world’s largest fully-integrated palm oil business and largest plantation portfolio, as well as reinforces agriculture as one of the core areas for Rajawali Group.”

“This partnership with Rajawali Group brings even greater capability to several of our existing businesses. With this acquisition, we will be the largest and strongest player in the palm oil sector globally, with the ability to extract and enjoy significant cost and operational efficiencies in both the upstream and downstream markets,” group president and CEO of FGV, Dato’ Mohd Emir Mavani Abdullah noted.

Darjoto Setyawan, managing director of Rajawali Corpora said, “This partnership adds a high level of technical capability and knowledge transfer such as in agri-technology and R&D. This transaction will enhance value-add to EHP and its shareholders through fully-integrated scale; global reach; refining and distribution.”

“This investment brings unique synergies that could not be achieved with any other partnership in the sector. It allows EHP to be part of a fully integrated supply-chain for the largest integrated palm oil, and largest plantation, business in the world. In addition, it will be from day one a world-leader in oleo-chemicals,” he added

The Rajawali Group took control of Eagle High late last year after a corporate exercise, which included a rights issue, where it subscribed to the shares at 400 rupiah each. The rights issue raised close to 11 trillion rupiah, which was used to acquire the plantations of the Rajawali Group.

Overpriced deal?

This EHP-FGV deal has received critique and has been termed “overpriced” by  a veteran newsman. Former NST Group chief editor Kadir Jasin pointed out that financially-troubled FGV had paid double the market value for the stake in the Indonesian plantation company.

He noted that FGV had made the acquisition at 800 rupiah (MYR0.23) per shares when it was valued at half the price. There was concerns over FGV’s finances as well.

“What is worrying is that the price paid by FGV is extremely high compared to the share value of EHP. FGV appeared to be so generous even though it is itself in financial trouble due to plunging crude palm oil prices, the floods in December-January that affected its plantations as well as shares in the KL Bourse (KLSE),” Kadir said in his blog, picked up by local media.

The veteran newsman also questioned if the overpriced investment had something to do with Prime Minister Najib Razak’s link with EHP owner Peter Sondakh.

Analysts too are cautious on the FGV’s move to acquire EHP shares. Credit Suisse has already downgraded FGV to an “underperform” status, from “neutral”.

“We worry that Rajawali, which will end up with 95.4 million FGV shares, could sell in the open market. This will be an overhang on FGV’s share price and believed the deal was too expensive for FGV,” Credit Suisse said in a report.

FGV’s net gearing to increase to 102 per cent in financial year 2015 from an earlier forecast of 51 per cent. Its net debt will increase to an estimated RM6.6 billion from RM1.7 billion as at March 31.

Alliance DBS Research said that FGV might face selling pressure on the acquisition of Eagle High – priced at more than a 70 per cent premium to the latter’s closing price.

CIMB Research analyst Ivy Ng said in a research note that FGV would be EHP’s largest but not controlling shareholder, and the acquisition could dilute Felda’s net profit for its 2016 fiscal year by 10 per cent.

“We are of the view that the proposed acquisition price for EHP is too high,” Ng said.

FGV’s net gearing would rise to 1.43 times shareholders’ funds from 1.05 times, and cash flow would also be hurt, she added.

Similarly, Maybank Investment Bank Research noted: “We believe that this proposal is unlikely to go down well with investors, as the acquisition is likely to be earnings per share dilutive in the short term, given the steep transaction price for a non-controlling stake of 37 per cent.”

Meanwhile, UOB Kay Hian Research analyst Chan Yuan She said the speed of acquisitions came as a surprise, as FGV has also just bought land and four companies (read below). “We are not positive on (the EHP) acquisition as it is expensive and cash flow will be tight due to the high capex for the new sugar operation in Papau and interest expense. This second acquisition of a 37 per cent stake in EHP will make FGV the single largest shareholder, followed by Rajawali of 31.6 per cent. FGV is unable to consolidate EHP’s landbank,” she noted.

Currently, EHP’ has a total landbank of approximately 425,000 hectares, with 67 per cent located in Kalimantan and the rest spread over Papua (9 per cent), Sulawesi (19 per cent) and Sumatra (5 per cent). There are approximately 152,000 planted hectares with 24 per cent immature and 76 per cent mature area – the average age of mature plantation is about 8 years.

Rajawali, one of Indonesia’s largest conglomerates, owns 65.5 per cent of EHP, according to data compiled by Bloomberg. EHP, through its subsidiaries, has rights to a total area of about 419,000 hectares of land and plantations in Kalimantan, Sulawesi, Papua and Sumatra provinces in Indonesia.

Other deals

On June 8, the Malaysian plantation group announced on Bursa Malaysia that it is acquiring a piece of oil palm plantation land in Beluran, Sabah, together with four subsidiaries from Golden Land Bhd, for MYR655 million, to expand the company’s land bank in Malaysia and Indonesia.

FGV said its wholly-owned unit Pontian United Plantations Bhd entered into a conditional sale and purchase agreement with Golden Land to effect the acquisitions.

The four subsidiaries that Pontian is buying from Golden Land are – Yapidmas Plantation Sdn Bhd, Sri Kehuma Sdn Bhd, Tanah Emas Oil Palm Processing Sdn Bhd and Ladang Kluang Sdn Bhd.

Collectively, the four have net assets worth MYR468.65 million and are mainly in the business of oil palm cultivation, as well as mailing and the sale of oil palm products in Malaysia.

The Sabah land acquired, measures approximately 836.10ha. FGV paid MYR583.28 million for the four companies, and MYR71.72 million for the land.

FGV said the acquisitions, partly financed by cash and borrowings, represent a strategic investment by the group and is expected to enhance the future earnings and shareholders value of FGV.

Separately, Golden Land the collective disposals will result in a gain of MYR15.23 million for the group, after taking into account the real property gains tax of MYR25.96 million and estimated expenses for the proposed disposal of MYR20 million.

“The board has yet to determine the utilisation of net proceeds but shall consider, among others, further investment to develop its Indonesian plantations and property development business as well as a cash distribution to shareholders of the company,” Golden Land said.

Last week, it was also reported that FGV was seeking a buyer for its non-core assets in North America, and has  invited offers for its crushing and refining businesses in the US and Canada.

Bloomberg reported that suitors have submitted first-round bids for the operations, which could fetch about $150mil.

FGV’s response

In an emailed response to this story, FGV said the proposed investment in EHP is in line with its plan to become a world leading integrated palm oil plantation company by way of increasing land bank, improved age profile of crops, cost optimization and strategic long-term partnership, with a notable conglomerate in Indonesia.

The partnership would also provide access to Asean’s largest single market while allowing us to gain a foothold in a key palm oil supply market.

FGV also highlighted that “it is important to note that the proposed implied EV (Equity Value) / hectare for the planted hectarage of Rajawali is approximately $17,400 per hectare – lower than the recent transactions involving NBPOL (EV / hectare of $25,900) and Unico Plantations (EV / hectare of $23,500). In comparing with recent Indonesian transactions, hectarages involved are small in nature, of less than 70,000 hectares.”

The group added that from its corporate perspective, the EHP deal presents FGV with a great opportunity as part of our expansion plan. As per FGV’s investment policy, all deals are subject to a thorough due diligence process as well as deliberation and approval by the FGV board.

Also read:

Palm oil producer Felda looks to sell non-core assets in North America

MSM in advanced talks for two upstream Indonesia acquisitions

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.