2020 pressed a temporary pause in local M&A activities

Possible vaccine rollout in February next year may lessen the need for companies to opt for M&As for sustainability

by ASILA JALIL / pic by MUHD AMIN NAHARUL

THE year 2020 saw mergers and acquisitions (M&As) talks taking place in a bid to maintain companies’ sustainability and expand business operations.

The Covid-19 pandemic has led many companies to shut operations, while financially stronger companies went on acquisition hunts.

Sunway University Business School economist Professor Dr Yeah Kim Leng said the “industry shakeouts” or “restructuring” that occurred during the period are part of the “creative destructions” that drive industry renewal and enhance the overall economy.

“Importantly, such M&As are driven by market forces and private sector players, thereby avoiding the moral hazard of government bailouts or selective support for distressed firms,” he told The Malaysian Reserve recently.

The impact of the pandemic, which is largely felt by the services sector, will mainly push M&A deals within the aviation, hospitality, travel and retail industries of various sizes from family-owned businesses to large conglomerates and chains.

Yeah opined that exits and sell-outs will also occur in the private education industry, mainly in the higher education segment as many of them have been grappling with weak financial positions before the pandemic.

The possible vaccine rollout in Malaysia by February next year, however, will lessen the need for companies to opt for M&As for sustainability.

“It will take at least six months of vaccine rollout and longer, depending on the availability, for a big enough coverage of the population for the pandemic to be suppressed sufficiently for social and economic activities to return to normalcy.

“If the immunisation programme is successful in containing the pandemic, then near-distressed firms may be able to survive and hang on to the economic recovery.

“Valuation will then increase and M&A activities will likely be less urgent when the economy is on the uptrend,” added Yeah.

Having said that, below are some of the major M&A deals that were closed, failed and remain on the table.

CP Group Acquires Tesco in Malaysia, Thailand

The most successful, large M&A deal that took place in this region this year was the sale of Tesco plc’s businesses in Thailand and Malaysia to Thailand’s Dhanin Chearavanont’s CP Group in March valued at US$10.6 billion (RM42.93 billion).

Following the deal, the government approved Sime Darby Bhd’s sale of its 30% shareholding in Tesco Stores (M) Sdn Bhd last month which saw the conglomerate make a gain of RM270 million from the sale.

According to reports, CP Group received the approval of the Thai antitrust agency for its acquisition of Tesco’s local retail business.

Under the agreement, the group has to comply with some conditions namely Chearavanont is not allowed to perform other modern-retailing mergers for three years not inclusive of e-commerce, said Thailand’s Office of Trade Competition Commission last month.

The acquisition enables CP Group to gain control of some 2,000 hypermarkets and grocery stores across Thailand.

Failed Mergers of Local Rival Airlines

The aviation industry is among the hardest hit sectors during the pandemic due to global travel restrictions that have left airlines in a prolonged period of uncertainty and suffered loss-making operations.

Prior to the pandemic, talks of a merger between national carrier Malaysia Airlines Bhd (MAB) and low-cost carrier AirAsia Group Bhd were rife.

Although Khazanah Nasional Bhd had pushed for the merger of the two companies, the fund’s stakeholders, however, strongly opposed the union due to the “lopsidedness” of the deal.

The Covid-19 pandemic has since put many carriers in financial stress, making any M&A activity now very unlikely as many carriers move into survival mode.

AirAsia registered a net loss of RM851.78 million in the third quarter ended Sept 30, 2020 (3Q20), compared to a net loss of RM51.44 million in the same period last year.

Its revenue dropped 85.6% year-on-year to RM442.91 million in the quarter due to subdued travel demand as a result of border closures.

After facing bribery allegations against its top executives in February, it was unlikely for the group to be among the four contenders vying for the ailing national airline.

It was speculated that the four bidders for MAB were Japan Airlines Co Ltd, Air France-KLM SA, AirAsia and Malindo Airways Sdn Bhd.

Talks of the merger, however, dissipated amid the pandemic which had largely reduced the number of air passengers and limited air travel in a bid to curb the virus.

Another Failed Banking Merger

In January last year, Al Rajhi Bank’s wholly owned unit, Al Rajhi Banking & Investment Corp (M) Bhd (Al Rajhi Malaysia), began talks with Malaysian Industrial Development Finance Bhd (MIDF) for a possible merger after receiving preliminary approvals from the Saudi Arabian Monetary Authority and Bank Negara Malaysia.

After many months, the merger talks failed as both parties could not come to an agreement, according to Al Rajhi’s exchange filing in Saudi Arabia in November.

Permodalan Nasional Bhd, MIDF’s sole shareholder, was estimated to gain around RM1 billion from the sale of a stake in MIDF and end up with 60%-70% shares in the combined entity, with Al Rajhi accounting for the rest.

According to a report by Focus Malaysia in February, the disagreement emerged as MIDF called for the Malaysian Shariah law for the merged entity, while Al Rajhi Malaysia was aiming to implement Saudi Arabian legislation, which is said to be more stringent than local regulations.

MIDF’s shareholders’ fund stood at RM1.7 billion last year, while Al Rajhi Malaysia’s was at RM753.36 million, according to their respective financial reports for the year 2019.

UEM Sunrise and EcoWorld Marriage?

A potential M&A that remains on the table is the merger of UEM Sunrise Bhd and Eco World Development Group Bhd (EcoWorld).

Shareholders and investors will likely know the outcome of the talks fairly early next year.

Analysts have questioned if UEM Sunrise, which is wholly owned by Khazanah Nasional Bhd, will get monetary benefit from the merger as it is foreseeable the company will have to absorb EcoWorld’s debts.

A merger between the government-linked company (GLC) and the private entity is also viewed to only benefit selected people although it involves taxpayers’ money.

In October, both companies considered a potential merger to create one of Malaysia’s largest property companies and sustain long-term value creation and growth.

Questions were raised on the merger which might set a lopsided arrangement in the future if certain considerations were not taken, causing the public to lose faith and confidence in GLCs and firms involved.

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