Mergers and Acquisitions (M&A) are an essential and healthy part of a vibrant capital market.
At present, while the prices of some listed companies are depressed, one would expect more privatization exercises to take place.
The typical scenario is usually when a controlling shareholder feels that the market is undervaluing their business and if they could buy out their business, they would be able to extract more value from the group. Or it could be a third party embarking on such a buyout.
In most of these cases, buyers would seek financing from financial institutions to embark on these buyouts.
However, industry sources say banks have become less inclined to fund buyouts as they have raised their credit ratings in light of difficult economic conditions.
“Banks, as part of their credit assessment, need to have certainty of cash flow before they can provide funding for any merger and acquisition exercise,” said an investment banker.
The decrease in the number of privatizations bears witness to this.
In the past eight months, only three privatizations have taken place at Bursa Malaysia. There were seven last year and 11 in 2019, three of which were unsuccessful.
Another banker explains that the heyday of debt buyouts, when corporate raiders had a free hand to seek funding to buy companies and strip assets, pay off loans and still get away with a good return, is coming to an end, at least in Malaysia. .
“When the funding stops, the party ends,” he enthuses.
The view is supported by Wong Muh Rong, who heads the business consultancy firm Astramina Advisory Sdn Bhd.
In the past, the founder of Astramina has been involved in a number of privatization deals such as Malakoff Corp Bhd, Road Builder Bhd and Magnum Bhd., explains Wong.
In today’s environment, obtaining financing from financial institutions is a challenge.
“As part of their due process, they are scrutinizing the deal more than ever because they need the certainty of cash flow for repayment before granting funding for privatization and other M&A exercises.
“Financial institutions are now focusing on the company’s sources of reimbursement for any funding granted for M&A activities.
“Any divestment plans or initial public offerings (IPOs) that have capital market elements are only considered secondary sources of repayment for any loan, as they involve risk in the capital markets under conditions of uncertain market as currently with the Covid-19 pandemic, ”she said. said.
Wong points out that banks are looking for parties to fund the repayment of their privatization deals from the cash flow and operating profits of target companies and not from the sale of assets that might not materialize.
It seems that the repayment capacities of companies have become a key criterion for banks to assess any loan.
“They don’t like lump sum payments, they need clear sources of reimbursement. This is why the financing of privatizations by the market is declining, because the banks see it as a risk of financing the companies to be privatized under the current market conditions, ”said Wong.
The most recent cast in a closed privatization deal was TA Enterprise Bhd, which was pulled from Bursa Malaysia’s main market in March.
Other ongoing privatization deals for this year are MMC Corp Bhd and Amcorp Properties Bhd, while waiting for the end of the exercise.
Last year other companies that were delisted included MB World Group Bhd, Caring Pharmacy Group Bhd, Amverton Bhd.
Although banks are less reluctant to fund privatization deals, there are opportunities for financing through private equity firms partnering with owners to privatize companies.
One example is the privatization of Yee Lee Corp by its founder Datuk Lim Ah Heng, which was backed by Singapore-based private equity firm Dymon Asia.
In the near term, Fortress Capital Asset Management CEO Thomas Yong believes the drop in privatization deals is likely to happen because he doesn’t think valuations are low enough to attract buybacks. This, he says, is due to the phenomenon of low interest rates which in turn has pushed up stock valuations in almost every stock market. And that won’t change because interest rates are likely to stay low for an extended period.
However, he says that the persistence of the trend depends on the dynamics and dynamism of market sentiment and valuation.
“The decline in privatization deals is probably attributed to favorable sentiments for equities, both nationally and internationally, where stock valuations have risen sharply, as well as the growing conservatism of banks towards new loans,” Yong said.
Meanwhile, for the cash-strapped private equity firms scouring the stock market for buyout opportunities, there aren’t many deals worth pursuing.
“It’s not easy to find a business that has significant growth potential and is reasonably cheap.
“Most good companies are highly regarded and the cheap ones may not meet our criteria. But we’re definitely on the lookout, ”said a CEO of a large Malaysian-based private equity firm.