Markets abuzz with talk of China-Sime Darby deal

Written by Julie Goh & Soo Ai Peng
Thursday, 05 November 2009 10:59

KUALA LUMPUR: With China’s President Hu Jintao visiting Malaysia next week, speculation is swirling the Malaysian government may finally seal a deal to sell 10% of planter SIME DARBY BHD [] to a Chinese group.

Media reports that Malaysia had offered China the stake in Sime, the country’s biggest palm PLANTATION [] firm by land ownership, first emerged in September, but were dismissed by Prime Minister Datuk Seri Najib Razak as pure speculation.

The chatter about the agreement that could be worth about US$1.6 billion (RM5.47 billion) is back, with one investment bank spelling out likely implications of the possible deal.

“Sime Darby could also spin off its plantations business, with a Chinese state-owned company taking a direct stake, since there would be little strategic value in its property and car businesses,” said the research report, obtained by Reuters through an investment banking source.

The source was not authorised to have the bank’s name cited because the report was meant for internal use.

Sime did not reply to an email from Reuters on the market talk. Based on Sime’s market value, a 10% stake would raise US$1.6 billion.

Its China operations accounted for 11%-12% of its revenue and 3%-4% of operating profit in fiscal 2008 and there is strong potential for growth given the size of China’s population.

Sime shares have jumped 71% this year, outperforming a 42% rise in the broader market index and a 57% gain in the plantation index.

The Malaysian government and various state funds own almost 70% of Sime, the country’s largest company valued at about US$16 billion, and Najib has said he wants companies with close links to the government to become more efficient.

China’s strategic backing will enhance Sime’s business in the country, where it is involved in motor and heavy equipment distribution, water treatment services, port operations, property development and palm oil sales and marketing.

Hu visits Malaysia on Nov 10- 11 en route to the Apec meeting in Singapore and will hold talks with Najib.

Analysts have previously said Sime needs a big overhaul, including possibly listing its prized plantations business and selling its underperforming motor unit, to boost valuations and compete better with fast-growing rivals.

The deal, if it materialises, is expected to serve the national interests of both countries as well as Sime’s, which has invested US$1 billion in six business segments in China.

The research report said China is keen to dilute Singapore-listed Wilmar’s dominance in the Chinese edible oil market, and may see the Sime investment to pursue this, said the investment bank’s research report.

Sime’s top management has been promoting its strategy of entering China’s edible oil market in global roadshows in recent months and the stake sale could help fund that expansion.

By finalising a deal with Sime, China, which imports a third of its edible oil demand, stands to lock in future supplies with demand growing at about 5% per year.

China is Malaysia’s main market for refined palm products, importing about 300,000 to 400,000 tonnes of refined palm olein a month. — Reuters


This article appeared in The Edge Financial Daily, November 5, 2009.