Highlight Quek shifts cement and concrete units again

Highlight Quek shifts cement and concrete units again
Business & Markets 2013
Written by Siow Chen Ming of theedgemalaysia.com
Tuesday, 24 September 2013 15:45

TYCOON Tan Sri Quek Leng Chan is again shifting the assets under the Hong Leong Group’s building materials division — for the fourth time in a span of 10 years.

It started in 2003 when NARRA INDUSTRIES BHD [], then known as Hume Cemboard Bhd, sold its fibre cement and concrete business to HUME INDUSTRIES (M) BHD [].

In late 2010, Quek through his privately held Hong Leong Manufacturing Group Sdn Bhd (HLMG), launched a privatisation of Hume Industries. The exercise was completed in April 2011. In November 2011, HLMG divested part of Hume Industries to HONG LEONG INDUSTRIES BHD [] (HLI).

Recently, HLI injected some of the assets that were originally from Hume Industries, as well as the valuable interest in Hume Cement Sdn Bhd, into Narra in exchange for shares in the latter.

After the proposed exercise, valued at RM448 million, HLI will distribute the Narra shares to its shareholders. The share distribution will see HLMG, the parent of HLI, end up with a substantial direct interest in the concrete and cement businesses of Narra.

The cement business, which started operations in April this year, is considered to be valuable.

It has been a long and complicated journey even for those who have been following the Hong Leong group.

When Narra divested its business to Hume Industries in 2003 for RM310 million cash, it made a RM189.3 million gain. Of the amount, the company distributed RM246 million cash to its shareholders. The biggest beneficiary was Hume Industries, which pocketed RM167.3 million by virtue of its 68% stake in Narra.

Without a core business after the divestment, later that year, Narra acquired the furniture manufacturing business from Hume Industries for RM57.72 million cash. The furniture business has remained Narra’s core operations — until the latest exercise to revive its glory.

In 2010, HLMG (then known as Spectrum Arrangement Sdn Bhd), which owned 65.07% of Hume Industries at the time, privatised the latter at a value of RM786.6 million. Hume Industries was holding the fibre cement and concrete products businesses acquired from Narra. It also held 41.5% of SOUTHERN STEEL BHD [], cash of RM340.2 million and 100% of Hume Cement Sdn Bhd, which was dormant then.

In late 2011, HLI acquired the entire equity interest in a “watered down” Hume Industries from HLMG for RM235.2 million via the issuance of new HLI shares. The value of Hume Industries shrunk from RM786.6 million, when it was taken private in 2010, to RM235.2 million because it did not have the 41.5% stake in Southern Steel as well as the 100% equity interest in Hume Cement, which had been transferred to HLMG post-privatisation exercise.

Apart from acquiring Hume Industries in 2011, HLI also subscribed for 175 million irredeemable convertible preference shares (ICPS) in Hume Cement for RM175 million cash, which was used to fund the CONSTRUCTION [] of a RM700 million cement plant in Gopeng, Perak. The ICPS, with a coupon of 2%, are to be converted into shares equivalent to a 75% stake in Hume Cement in 2017.

After the completion of the corporate exercise proposed last week, the new Narra will have the concrete products business, while the fibre cement business and concrete roofing tiles business will remain with HLI. The crown jewel in Narra would be its hold over Hume Cement.

In the proposed exercise, HLI will also inject its 175 million Hume Cement ICPS into Narra for RM300 million, to be paid in new shares (of Narra). This is a huge gain for HLI, considering its original investment cost was RM175 million.

Additionally, Narra will acquire 100% equity interest in Hume Cement from HLMG for RM100 million also by issuing new shares to the latter.

All in, the proposed exercise will see HLI temporarily owning a 72.64% stake in Narra before distributing all its shares to shareholders, which include HLMG. Following the distribution of the shares, HLMG will end up with a 78.57% stake in the enlarged Narra, from the current 61.59%.

With close to a 79% stake, it is likely that HLMG may eventually launch a privatisation exercise for Narra, just like it did for Hume Industries in 2010, and its recently failed attempt to privatise Hong Leong Capital Bhd.

While at this stage, Narra says HLMG intends to seek a waiver from Securities Commission Malaysia from the obligation to undertake a mandatory offer, some analysts say it’s just a matter of time. Anyhow, even without the privatisation of Narra, by making the company a cement play, it has attracted investor interest.

It is worth noting that Hume Cement commenced commercial operations in April and has a plant in Gopeng, Perak, with a rated capacity of 5,000 tonnes per day.

Investors may have seen that coming, given the sharp rise in Narra shares since the proposed exercise was announced last Wednesday. This was despite the proposed capital reduction and consolidation exercise in which Narra will consolidate every two shares into one.

Both HLI and Narra gained after the news on the asset-shifting exercise. Narra, in particular hit limit-up twice.


This story first appeared in The Edge Malaysia Weekly Edition, on September 16 - September 22, 2013.