Will PNB property merger add value?

Article in the Business Times: "PNB merger plan to create global giant":


Permodalan Nasional Bhd’s (PNB) plan to merge three of its biggest property companies, including SP Setia Bhd, is to create a giant that can compete globally.

PNB, the country’s biggest asset manager, is reportedly studying a proposal to consolidate SP Setia Bhd, Island & Peninsular (I&P) Sdn Bhd and Sime Darby Properties Bhd.

Its president and group chief executive Tan Sri Hamad Kama Piah Che Othman said recently the company is also looking at the feasibility of investing overseas.

He said all the research and preparations for an overseas venture have been completed.

“By consolidating the three companies, there will be more streamlining of businesses and operations. Except for I&P, the other two have international presence.

As a single giant, it would be easier to buy more assets overseas, undertake major developments and expand earnings,” an industry source told Business Times.


That last argument sounds reasonable, but will it work in practice?

There is a large counterforce at work, one that is often neglected. That counterforce has to do with bureaucracy, adding even more layers between the people who make the decisions and the people who do the actual work. Luckily, if I may add, because otherwise the world would be ruled by the big corporates.

There is an earlier example of PNB companies merger together, that time in the plantation industry. Kinibiz wrote a series of articles about that merger, for instance in "Sime Darby loses value since 2006 merger" it is stated:


Last Friday, on April 4, Sime Darby Bhd closed at RM9.26, putting its market capitalisation at RM56.1 billion.

That is 5.7% lower from the RM59.5 billion value when the conglomerate re-entered the stock market on Nov 30, 2007 after the 2006 Synergy Drive merger. In the meantime the FBM-KLCI, the barometer of stock market performance among large companies has steadily grown over the years.

On Nov 30, 2007, the FBM-KLCI or just KLCI as it was then closed at 1,396.98 points. Last Friday the benchmark index closed at 1,856.61 points. This means in a bit more than six years, the index has grown by a third.

Perhaps a more fitting comparison would be a plantations company making up the 30-company benchmark index, say Kuala Lumpur Kepong Berhad (KLK), given that roughly half of Sime Darby’s earnings come from its plantation division. Last Friday, KLK closed the trading session at RM23.62, putting its market capitalisation at RM25.16 billion.

That represents an increase of 49.5% since Nov 30, 2007 when KLK’s market capitalisation was at RM16.83 billion — a growth of over RM8 billion in a six-year period.


KiniBiz even makes a case that breaking up Sime Darby would create extra value: "RM20 billion extra value by breaking up".

Next to that, both the handling of the General Offer by PNB for SP Setia and the subsequent events were not exactly impressive either, definitely not from a CG point of view nor from the point of view of creating value for SP Setia's minority investors, in the contrary.