Best M&A Deal Salcon’s timely exit from China

by **Cals** Fri 27 Dec 2013, 16:35

Best M&A Deal Salcon’s timely exit from China

Business & Markets 2013

Written by Kathy Fong of theedgemalaysia.com

Friday, 27 December 2013 14:45

IT’S not often that companies get to exit from China without suffering some losses. But Salcon Bhd managed to do just that, and it made a profit as well.

The company sold its water assets in China for RM518.28 million cash — an amount that exceeded its market capitalisation of RM414.3 million at the time the deal was clinched.

On the face of it, the net gain to Salcon was RM78 million. It may not be much to shout about but closer scrutiny reveals that Salcon could pocket some RM284 million cash, or 47.29 sen per share, from the disposals after netting off liabilities and minority interest.

That is a considerable sum for Salcon and makes the disposal exercise, advised by Hong Leong Investment Bank Bhd, among the better M&A transactions.

The disposals involve the sale of five water concessions, two waste water concessions and two raw water concessions in several provinces in China, namely Fujian, Zhejiang, Jiangsu and Shandong.

These concessions range from 30 to 50 years and have a total combined capacity to treat more than 1,200 million litres per day (mld).

The disposal of its water concessions in China will see a transformation of sorts for Salcon. This is because the concession business generates 55% of the group’s revenue.

Its engineering and construction division contributed 42% of total revenue, followed by the other divisions with 3%.

Given the tough operating environment in China, analysts see the disposals as an opportunity for Salcon to unlock and monetise its investment there.

“Not many companies have come back with a tidy profit from China. More often than not, we hear of companies losing their capital,” says an analyst.

Salcon intends to return up to RM30 million cash, either in the form of capital repayment or special dividends, to shareholders.

Based on a share capital of RM608.1 million, RM30 million will translate into 4.93 sen per share.

Salcon’s total bank borrowings were RM352.92 million as at Oct 31. The company has allocated RM97.54 million for loan repayment, which is expected to save interest expense of about RM5.3 million a year.

After unlocking its water asset values and beefing up its cash position, Salcon is now nimble and able to re-mobilise its capital and resources to expand other core businesses and broaden its earnings stream.

One area that Salcon intends to explore is property development, according to its executive director Datuk Eddy Leong, who is the single largest shareholder with a 12.98% stake.

Meanwhile, Eco World Development Holdings Sdn Bhd has taken over a company called Kembar Makmur Sdn Bhd, which holds a 49.99% stake in Salcon’s property subsidiary Nusantara Megajuta Sdn Bhd.

According to Leong, Salcon is teaming up with Eco World, which has undertaken a reverse takeover of Focal Aims Holdings Bhd, to develop two parcels of land in Johor Baru that Eco World acquired in January.

Focal Aims will soon change its name to Eco World Development Group Bhd. Leong is currently the deputy chairman of the property firm. Liew Tian Xiong, son of SP Setia’s Tan Sri Liew Kee Sin, is the executive director.
So, the exit from China is a timely move as it provides much-needed cash for Salcon’s next big venture.