Wednesday, February 18, 2009

Selangor Water Concession Buy-Back Offer: A Response

I received the following response below from HYS, who believes that our approach to the take over of water assets and concessions in Selangor victimises bondholders and shareholders. I will not respond in detail, as I believe the answer is already in the statement made earlier on the basis of our acquisition.

My short reply is, shareholders and bondholders enter into agreements eyes wide open. Should a concessionaire decides to so over-leverage itself, raising more money than it ever needed to operate the business relative to its actual equity investment, should the Government (i.e., Malaysian tax-payers) be made to bear the brunt of the bailout?

The politely written letter is as follows:
According to respective company's announcement, the Selangor Government offer to acquire their respective water business without taking over the debt.

Personally, I find it not fair to the shareholders of the company and the lenders.

The initial investment in the business was financed by equity holder through the company's share and lenders via debt. The purchase consideration offered by the State Government is below the sum of company's market capitalisation and net debt. Eventhough the management of the company would love to support the State Government's Proposal, they still need to take care the stake holders' wealth.

If the companies are being forced to sell the assets to the State Government, the implication to the malaysia stock market's sentiment is unpredictable. The lenders may end up holding huge NPL.

Hope I make my point clear.
Just to comment a little further, it's a little like the bailout of Malaysian Airlines (MAS), which got into deep financial trouble in the early 2000s due purely to excesses and weak management, and was unable to pay back its bondholders - should the Government have step in as it did and pay double the value of MAS, at the expense of the tax-payers?

So what do you think?
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