MRCB, IJM Land to merge

KUALA LUMPUR: Malaysian Resources Corp Bhd (MRCB) and IJM Land Bhd on Tuesday, Nov 23 announced their proposed merger exercise, which will create the country's second largest property player after the enlarged UEM Land Holdings Bhd, with a market capitalisation exceeding RM7 billion and a landbank of over 9,000 acres.

This is the second major property merger and acquisition exercise this month — after UEM Land Holdings' takeover of Sunrise Bhd — involving a GLC and a private sector company.

On Tuesday, both IJM Land and MRCB announced the proposed merger exercise through the signing of a memorandum of understanding (MOU). Under the proposed merger, shareholders of both companies exchange their shares for that of a new merged company, which will be listed after the second quarter of 2011.

The merged company will be listed on Bursa Malaysia upon completion of the proposed merger in place of IJM Land and MRCB.

The non-binding offer price for IJM Land and MRCB are RM3.65 and RM2.30, with premiums of 18.5% and 7% respectively, over their last traded prices. Prior to their suspension from trading on Monday, IJM Land and MRCB last traded at RM3.08 and RM2.15, respectively.

At the proposed take-over prices, IJM Land is valued at 2.43 times book and MRCB at 2.61 times book, based on their net assets per share of RM1.50 and 88 sen, respectively, as at Sept 30.

Investors should note that the proposed corporate exercise is at the MOU stage, with a definitive merger agreement expected to be signed by Dec 14.

"Both parties will work towards a definitive agreement by next month. The announcement will be made which will set the salient terms of the agreement," said Rafidz Rasiddi, RHB Investment Bank Bhd's head of investment banking. RHB Investment Bank is the joint adviser of the deal

At a press conference on Tuesday, both companies said that the merged company would have sizable market capitalisation and a landbank of about 9,000 acres, combined revenues of over RM2 billion and an asset base in an excess of RM3 billion.

But both companies did not reveal details on the structure, ownership or management of the merged entity. Officials say these will be disclosed when the deal is signed.

The EPF factor
Interestingly, the Employees Provident Fund (EPF) is a common shareholder in all the companies incolved in the merger. The provident fund owns a 19.4% equity stake in IJM Corp, while it is the single largest shareholder of MRCB, holding a 41.63% stake.

Both MRCB and IJM Land declined to comment on whether the EPF was instrumental in conceiving the merger.

"The enlarged entity is expected to harness cross synergies and increased visibility as a listed entity," said Datuk Soam Heng Choon, managing director of IJM Land.

MRCB CEO Mohamed Razeek Hussain said, "This is a great merger — a great partnership. It will be a great marriage that we anticipate. With our two companies, we feel that we complement each other. To a certain extent we also mirror each other but the overlap is minimal — be it in geography, target market, location and also expertise."
"The strong balance sheet will enable it to better position itself to capitalise on business expansion opportunities both locally and abroad," said Rafidz of RHB.

Presently, the property development activities of MRCB are heavily concentrated on its flagship project, KL Sentral, which has a gross development value (GDV) of over RM12 billion. The company also has a 4,000-acre township in Perak.

As the property arm of EPF, its crown jewel going forward would be the development of the 3,300-acres of Rubber Research Institute (RRI) land in Sungei Buloh, which has been awarded to the EPF.

IJM Land's strength lies in township and residential development with a large number of projects in the Klang Valley, Penang, Johor, Negeri Sembilan, Sabah and Sarawak. It also has projects in Vietnam and China. The company has a landbank of 5,183 acres.

"When we go overseas we always feel that we are very small because they talk in billions! Sometimes, we feel that we are undersized. That's why we are coming together to form a larger entity," IJM Land's Soam said.

IJM Land is a 62.48%-owned unit of IJM Corp Bhd. The government of Singapore holds a 7.26% stake.

Merger of equals
On paper, the merger appears to be almost one of equals. At the proposed takeover prices, IJM Land has a market capitalisation of RM4.04 billion and MRCB some RM3.17 billion, giving the merged entity a combined market capitalisation of RM7.21 billion.

According to rough estimates by The Edge Financial Daily, the market value of the merged entity could amount to as much as RM8.87 billion, due to IJM Land's large number of derivatives and debt instruments, which will substantially increase the company's overall market valuation.

IJM Land has 222.56 million listed warrants outstanding, which expire in 2013 and have an exercise price of RM1.35.

When fully converted for the merger exercise, IJM Land — and the merged entity — will stand to receive RM300.46 million in cash, but with another 222.56 million new shares issued. The warrants last traded at RM1.75.

IJM Land also has issued RM400 million in unlisted redeemable convertible unsecured loan stocks (RCULS) to its parent, IJM Corp, with a conversion rate of RM1.74 for each RCULS. This implies potentially another 229.89 million shares to be issued.

Thus, IJM Land could, in total, see its fully diluted share base expand by 452.45 million shares, from 1.108 billion to 1.56 billion shares.

This will give IJM Land an implied total market value of RM5.7 billion, and the merged MRCB-IJM Land entity a combined value of RM8.87 billion — not far off from the merged UEM Land-Sunrise's roughly RM10 billion.

Of this enlarged market capitalisation of RM8.87 billion, The Edge Financial Daily estimates that shareholders of IJM Land and MRCB will account for 64% and 36%, respectively, of the total.

In this scenario, according to calculations by The Edge Financial Daily, parent IJM Corp (in which EPF also holds the largest stake of 19.4%) will hold a roughly 40% stake in the merged entity, with EPF owning 21%.