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1MDB's Global Power Play
March 9 2012 | The Star | By B.K. Sidhu and Jagdev Singh Sidhu |
1MDB’s assets buy to launch it into international market |
PETALING JAYA: 1Malaysia Development Bhd's (1MDB) recent purchase of power assets from T. Ananda Krishnan provides the investment agency a launch pad for a bigger role in the local and foreign energy market, especially in the Middle East.
The purchase also makes 1MDB the second largest independent power producer (IPP) in the country after Malakoff Bhd. Last Friday. 1MDB inked an agreement to buy Ananda's power assets via Tanjong Energy Holdings Sdn Bhd for RM8.5bil. Tanjong has several assets that produce 3,951MW of power.
Shahrol: ‘We won because we put in a good bid. It was fair pricing and we were also not the highest bidder.’ – Starpix/RICKY LAI
“Bottomline is that we will be as competitive as we can in trying to build capacities. We had looked at (buying) Jimmah power plant a year ago but that did not happen,” 1MDB chief executive officer Shahrol Halmi told Starbiz.
The immediate focus is to complete the transaction, which would take about two months, and to gather information from the Tanjong team as to the direction to be taken to further entrench itself in the global energy sector.
1MDB also has strategic partners in the Middle East and it could jointly explore opportunities there since some of the older plants would need to be retired.
The tricky part, Shahrol said, would be how to secure fuel supply on longterm contracts in themiddle East.
Asked if there was a need to make more investments into the assets acquired, he said: “Of course. The Powertek plant is the first generation IPP and its power purchase agreement expires in 2016.
“We expect to do something to the plant. We are not in deep discussion with the management for obvious reasons but we believe the company is already looking at upgrading it.”
Ananda had put his power assets up for sale for some time and the biddingprocess saw 12 international and local companies, including Saudi Arabia & Electricity Co, which was said to have put in the highest bid at Us$3.6bil.
Tanjong Energy owns and operates eight power plants with investments in five power plants in Malaysia, Egypt, Bangladesh, Pakistan, Sri Lanka and the United Arab Emirates.
The winner was originally expected to be announced later this month but the bidding process was accelerated. Asked why that happened, Shahrol said: “Because a lot of parties were keen on the assets. The longer you drag on the messier it would be. (The advisers) ran the process and dealt with it. They were good and professional in providing access to data and information.” Goldman Sachs was 1MDB’S adviser while Standard Chartered was Ananda’s.
“We won because we put in a good bid. It was fair pricing and we were also not the highest bidder.” Asked how 1MDB planned to fund the acquisition, Shahrol said it would be like a leverage buyout.
At some point, 1MDB would look at a cheaper source of funding.
“Principally, like others, we want the most cost effective source of funds,” Shahrol said.
Shahrol said the deal was done on a commercial basis and said banks would not lend it money if the deal was over-priced.
“We have done a thorough process and the conclusion that we drew from both the financial and technical advisers is that this is a sound cash flow business in a sector which is going to grow when the world economy grows. That is why we think it is a good business to get into and we are comfortable with the management. They have proven with the local and regional assets that they have.”
Some have also raised the issue of political risks involved since some plants are based in Egypt and Pakistan, to which Shahrol said that was studied and analysed by 1MDB.
“We believe that the plants in Egypt supply a significant amount of power (to the population) and even in a turmoil they are still running and the lights are still on. This goes to show that something can be managed and done on a commercial basis. Similarly with other plants, we have deliberated at board level and the value we paid is quite good,” he said.
He added that the cashflow from the power assets was Rm1bil a year.
“It is not so sexy like the first IPPS (where the rate of return is 15% to 16%) but 7% to 8% is the kind of returns (these plants offer). These days no one can expect double-digit (ROIS).”