Tuesday, May 30, 2017

Will we be left with a skeletal Proton, stripped of its assets?

The Second Finance Minister, Dato’ Seri Johari Abdul Ghani announced that the Ministry of Finance (MoF) agreed to pay RM1.1 billion in “research grant” and drawdown the final instalment of RM250 million of its RM1.5 billion soft loan to Proton.

However, as I wrote yesterday, I found it inexplicable that Geely needed only to pay RM170 million for a 49.9% stake in Proton which is about to receive the above RM1.35 billion in cash from the MoF.

Worse, despite the high profile acquisition signing by the respective parties, Geely makes no mention at all on its future plans for Proton, particularly if it plans to invest more funds into Proton to, in the words of Dato’ Seri Johari, “bring back the glory days”.

In fact, when you study the transaction in detail, Malaysians are concerned that the deal is essentially an asset stripping exercise with Proton’s skeletal remains to be returned to the Malaysian government in time to come.

Under the deal, Proton will dispose of it’s entire stake in UK-based Lotus car manufacturer to a Geely-led joint venture company for GBP100 million or approximately RM556 million.  It should be remembered that Proton had paid RM1.96 billion to acquire Lotus in 1996.  From the above transaction details, it is obvious that Geely is more interested in Lotus which it will become the majority shareholder, as opposed to Proton.

In addition, we have also discovered that as part of the disposal exercise, the valuable landbank previously held by Proton worth an estimated RM540 million in book value will also be fully-transferred to DRB-Hicom, who acquired Proton from Khazanah Nasional in 2012.  Property analysts interviewed by the Edge Weekly suggested that the market value for these assets are significantly higher.

The problem is, despite the above assets being stripped from Proton, the Government’s RM1.5 billion soft loan to Proton will remain outstanding.

Under all sensible circumstances, with Geely’s acquisition of Lotus and the transfer of property assets to DRB-Hicom, the Government’s soft loan must be repaid in full.  At the very least, the “new” joint-shareholders of Proton – DRB Hicom and Geely must provide full corporate guarantees for the loan in the event of default by Proton.

However, we have since discovered that in the event of default, the soft loan will be converted into 2.1 billion new shares in Proton, which constitutes at least 65% of the company!

In other words, if Geely and DRB-Hicom chooses not to continue investing and sustaining Proton, and as a result, the latter fails to repay the Government’s RM1.5 billion soft loan, then the bleeding company will once again be owned by the Government!

The clear winners in this outcome are Geely which got what it wanted out of the transaction – the Lotus car and brand; and DRB-Hicom which got all the valuable property assets.  In the event that Proton fails to recover, then the loss-making baby will be inevitably returned to the unwitting arms of the Malaysian tax-payers.

If Proton for whatever reason becomes very profitable, the private companies will keep all the profit. However, if Proton, in the plausible scenario of continuing to make hundreds of millions of losses annually, the losses will be ultimately be “socialised” by the Malaysian Government.

The Ministry of Finance must answer as to why the Government has provided two private companies – one local and one foreign, such a fantastic financial failsafe.  Its heads, Geely and DRB-Hicom wins; and tails, the rakyat loses.

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