KUALA LUMPUR (May 5): Financing was already in place for IWH CREC Sdn Bhd’s plan to acquire a 60% interest in the Bandar Malaysia project for RM7.41 billion, and approval from Bank Negara Malaysia had also been obtained, according to a source close to the matter.

The financing facilities included a performance bonus bond as well as a term loan, and the drawdown was scheduled to have started on April 17, said the source.

The deal was called off on Wednesday by TRX City Sdn Bhd on the grounds that IWH CREC had failed to meet payment obligations. TRX City, an indirect wholly-owned unit of the finance ministry (MoF), will now be inviting expressions of interest in the role of master developer of Bandar Malaysia, with full ownership being preserved by MoF.

IWH CREC, however, has said that TRX City’s termination notice and announcement “given the factual matrix, do not fully and accurately reflect the circumstances and conduct of the parties in the matter”.

The Wall Street Journal, meanwhile, reported that the deal fell apart after China’s government refused to authorise the investment by China Railway Engineering Corp (CREC).

IWH CREC is a 60:40 joint venture between Iskandar Waterfront Holdings Sdn Bhd (IWH) and CREC. Tan Sri Lim Kang Hoo holds a 63% stake in IWH, while Kumpulan Prasarana Rakyat Johor Sdn Bhd owns the remaining 37%.

The collapse of the deal is expected to have a negative impact on Iskandar Waterfront City Bhd (IWC) — which has proposed a merger with sister company IWH through a share swap exercise — given that IWH’s interest in Bandar Malaysia is considered the crown jewel of the merger exercise.

A fund manager with a local fund house said the merger exercise is likely to proceed although valuation could be impacted. The definitive merger is scheduled to be announced today.

The fund manager sees IWC’s share price being significantly impacted unless a firmer signal of a reversal of the Bandar Malaysia sale termination emerges before its shares resume trading on Monday after a two-day suspension.

Mercury Securities Sdn Bhd head of research Edmund Tham, however, said the merger exercise could see a delay following the termination of the Bandar Malaysia deal.

“It is still too early to say but the merger exercise has led to the surge in IWC’s share price and the momentum was because of the Bandar Malaysia project,” said Tham. “Without this deal, it is hard to say if the merger exercise would go through. One thing that is quite certain is that if things don’t turn positive in the next few days before IWC’s shares resume trading, its share price would suffer quite a bit.”

UOB KayHian analyst Vincent Khoo shared in his report yesterday that negative pressures are expected on IWC’s share price in the near term.  “In the near term, investors may well ignore the potential valuation synergy from the IWC-IWH merger, without the Bandar Malaysia factor,” he said.

Khoo, however, added that even without Bandar Malaysia in the merger, IWC-IWH still hold about RM29.7 billion worth of land bank, based on the open market value and not on the discounted cash flow of development profits. But given that the land is located in Johor Bahru, where the property market sentiment remains depressed, the appreciation of values may be capped.

The market yesterday saw shares of Ekovest Bhd, which has Lim as a common shareholder, slump 18.2% to RM1.17 on the back of the termination of the deal.

Khoo said Ekovest is an entirely different picture from IWC as its fundamentals remain intact. He has issued a “buy” call for the company with a target price of RM1.55.

“Any significant weakness in Ekovest should create the opportunity to accumulate. The fundamentals of the company remain intact,” he told The Edge Financial Daily.

An analyst who asked not to be named, however, said the termination of the deal signals a deteriorating relationship between Lim and the government and that could have a long-term negative effect on Ekovest. “A lot of the contracts awarded to Ekovest are likely to do with the relationship between Lim and the government. It is easy to see how a soured relationship could hurt Ekovest,” he said.

This article first appeared in The Edge Financial Daily, on May 5, 2017.

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