Getting best price for BRDB assets

KUALA LUMPUR: Bandar Raya Development Bhd (BRDB) has received a letter of offer from its major shareholder Ambang Sehati Sdn Bhd to buy the former's assets at the price to be determined later.

Ambang Sehati, which is controlled by BRDB chairman Datuk Mohamed Moiz Jabir Mohamed Ali Moiz, is keen to buy the company's prime asset Bangsar Shopping Complex (BSC), CapSquare Retail Centre in Kuala Lumpur and Permas Jusco Mall in Johor.

These properties carry a total value of RM942 million based on a revaluation exercise that was carried out at end-December 2010.

Ambang Sehati is expecting a decision from the board on whether BDRB intends to sell the assets by next Monday. The purchase consideration of those assets has yet to be determined. It is expected to be a cash deal.

In the announcement to Bursa Malaysia, Ambang Sehati said it believed that the divestment would enable BRDB to "monetise these assets and achieve more efficient utilisation of its capital".  Also in the same statement, BRDB pointed out that its shares had been trading at a "significant discount" to its net asset value.

Ambang Sehati's belief does make commercial sense. To achieve that, BRDB will have to ensure that it gets the best price for these assets, otherwise it defeat the monetising purpose.

So the next question that arises on the deal is whether Ambang Sehati will offer the best price to BRDB, and help boost the company's share price performance in the long run. Furthermore, there is a stigma attached to the deal as it is a related party transaction (RPT).

Naturally, an open tender will help BRDB fetch a better price for its prime assets. Industry observers said there would not be any shortage of interest in the assets.

BSC is a prime shopping mall in a premium location in Kuala Lumpur. Who wouldn't want it?

Ambang Sehati could always participate in the tender, and if its offer price is competitive, it will surely win the tender.

While BRDB emphasised that the exercise was to unlock the value of its assets, justification of the price is the key issue here considering that the transaction is with a substantial shareholder of BRDB.

Ambang Sehati, which is looking to acquire BRDB's crown jewel, has an 18.8% equity stake in the property firm. The largest shareholder of BRDB is Credit Suisse with some 23.57% equity interest. It is not clear who Credit Suisse is holding the shares for.

A mitigating point for BRDB is that Ambang Sehati has proposed to acquire the assets collectively, and not individually or any part thereof, at a price to be determined by independent valuers to be mutually agreed on. In other words, Ambang Sehati is not cherry picking and choosing the best asset it wants.

Still the question remains: Will BRDB be able to derive the best out of the divestment even if it were to dispose of the assets individually to Ambang Sehati?

There is market talk that BRDB would return part of the sales proceeds to shareholders. Should the board decide to declare a hefty dividend, being a substantial shareholder, Ambang Sehati will receive a chunk of the payout.

But if such an exercise were not conditional, would the deal still go on? In other words, if the payment of dividend were not coming from the proceeds of the sale of the assets, would shareholders agree to a deal? Would even Ambang Sehati agree to undertake the exercise?

There are concerns that the divestment, if approved by shareholders, will leave a dent in BRDB's cash flow.

Rating Agency Malaysia Bhd (RAM) pointed out that should the proposed acquisition be accepted, BRDB would be divesting all of its investment properties, which have been providing a stable source of recurring rental income.

The rating agency said the investment properties division, which accounted for 21% of BRDB's operating profit in 1HFY ending Dec 2011, had been expected to contribute between 20% and 30% of the group's projected operating profits over the next three years.

"Furthermore, the divestment will steer BRDB towards becoming a pure property developer as it will cease to benefit from its more stable income from property investment. This, in our opinion, heightens the group's business risk," said RAM.

RAM's statement on the heightening of business risk reflects the thinking in the minds of some shareholders and this is something that the management should consider before agreeing to accept the offer.

Considering BRDB is parting its cash generating assets, the company should never accept a raw deal.