KUALA LUMPUR (Aug 26): After weeks of speculation, Sime Darby Bhd finally came up with the proposal to acquire Permodalan Nasional Bhd’s (PNB) 61.2% stake in UMW Holdings Bhd, confirming market talk that the two automotive and industrial giants are going to be merged.

While UMW shareholders are now presented with the opportunity to exit the automotive business, shareholders of Sime Darby will have more exposure to the sector. Not only will the group add more brands under its stable, but it will also be well entrenched in the automotive sector.

When announcing the deal, Sime Darby group chief executive officer Datuk Jeffri Salim Davidson says that by working together with Toyota, the group will be opened to opportunities in the future, and perhaps in other countries.

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On the surface, one can appreciate the streamlining of Sime Darby’s automotive business through the acquisition of UMW, as it will provide the group — long known for its association with luxury marques — mass market brands and models that will expand its reach.

However, UMW Toyota Motor Sdn Bhd and Perusahaan Otomobil Kedua Sdn Bhd (Perodua) — the two main arms of UMW’s automotive business — are mainly domestic players. With the local market unlikely to grow beyond 800,000 units per year, for the automotive business to be a growth sector for the merged entity, it has to be taken beyond the domestic market.

The bigger picture is the reallocation of capital for PNB, from heavily focused on the domestic market, to one that is more diversified geographically, opines a banker who dealt with PNB and its investee companies.

The acquisition by Sime Darby would provide PNB with RM3.57 billion in cash that it could deploy elsewhere, as it searches for better returns for its unitholders. Meanwhile, UMW will remain a part of the group through Sime Darby, which is another strategic asset of PNB.

It is not the first time for PNB to try to create value through restructuring its investee companies. Back in 2017, UMW Oil & Gas Corp Bhd was demerged from UMW Holdings, in order to make the latter more focused on the automotive and industrial sectors.

However, for the merger to be beneficial to PNB’s unitholders, the potential returns from its investment in the enlarged Sime Darby must be more than the returns that it is currently getting from its investments in the UMW and Sime Darby respectively.

The merger between Sime Darby and UMW would create a behemoth industrial and motor group with presence in various markets in Asia-Pacific. Can the merged entity leverage its size to become better?

 

By Kamarul Azhar. 26 August 2023.

Source:  The Edge Malaysia. https://theedgemalaysia.com/node/68028212. 27 August 2023.