Decision time for UMW Oil & Gas
Board likely to decide today on the proposed takeover of Icon and Orkim
PETALING JAYA: The board of UMW Oil & Gas Corp Bhd (UMW-OG) is expected to decide today the proposed acquisition of Icon Offshore Bhd and Orkim Sdn Bhd amid differing opinions on the valuations of the two assets.
The group’s board is also expected to weigh in on whether the assets that are on the table would be able to secure enough contracts from national oil company Petroliam Nasional Bhd (Petronas) to ensure its high utilisation.
Sources familiar with the matter said there was a difference in views on the valuation of Icon and Orkim.
“Another issue is whether there will be enough contracts from Petronas to support the utilisation of the assets if the deal goes through,” said a source.
The proposed corporate exercise between UMW-OG and Icon as well as Orkim was mooted in January this year as part of Permodalan Nasional Bhd’s (PNB) move to restructure its companies and position them to focus on their core competencies. For instance, PNB wants to see UMW-OG’s parent company UMW Holdings Bhd go back to its automotive and heavy equipment business.
In relation to this, in January this year, UMWOG had proposed to acquire Icon for RM589mil and Orkim for RM472.7mil.
Under the deal, UMW-OG proposed to acquire a 42.3% stake in Icon held by Ekuiti Nasional Bhd (Ekuinas) at 50 sen per share. The offer would trigger a mandatory takeover offer of Icon, where shareholders can opt for shares in UMWOG at 80 sen each or cash of 50 sen.
Ekuinas, which has opted to take the shares, will end up with a 12.6% stake in UMW-OG should the deal go through.
UMW-OG will also acquire a 95.5% stake in Orkim from Ekuinas for RM472.7mil cash.
Doubts over the viability of the deal emerged after UMW-OG disclosed in an April 19 stock exchange filing that the respective parties were seeking an extension of the period available to conduct due diligence on the assets. The cut-off period for this was extended to May 19, 2017.
At the same time, the cut-off date for the parties to fulfil, waive or complete the conditions precedent in the deal was extended by three months to July 19.
Against the backdrop of record-low charter rates for offshore oil and gas vessels, some say that valuing these assets pose a considerable challenge. The proposed acquisition prices have pegged Icon at one time its price-to-book value (PBV), while Orkim has been valued at a substantial 3.6 times PBV.
In a recent note, AmInvestment Bank Research said that the proposed acquisitions would lead to value erosion for UMW-OG against the backdrop of an offshore sector still struggling with operating losses.
“We maintain our view that the abortion of these acquisitions would be value enhancing for UMW-OG. Without these acquisitions, we estimate that the merged entity’s much-needed RM1.8bil recapitalisation plan could have been cut by 60% to RM700mil, thus resulting in a lower dilution of 7% to minority shareholders,” AmInvestment said, adding that it had upgraded UMW-OG to a “buy” with a fair value of 80 sen from 65 sen previously.
It is worth noting that the potential termination of the acquisitions has no bearing on the proposed share dividend exercise being initiated by UMW-OG’s parent company UMW Holdings. UMW Holdings plans to distribute its entire 55.73% stake in UMW-OG to shareholders via a dividend-in-specie.
The distribution will see PNB, which owns a controlling stake in UMW Holdings, end up with a 45% direct stake in UMW-OG. Meanwhile, the Employees Provident Fund will see its 4.7% stake being increased to 13.8% after the exercise.