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Saturday, November 13, 2010

What's in it for UEM Land?

P. Gunasegaram says UEM Land's offer for Sunrise raises questions as to how it can benefit from the deal.

NO matter how you look at it, it's a rather interesting deal and a very intriguing one too. It's not everyday that a group of entrepreneurs gives up control of their prized asset to a government-linked company (GLC) and yet remain in the group, accepting a minority stake.

We are of course talking about UEM Land's takeover of developer Sunrise Bhd (see our cover story this week), controlled by businessman Datuk Tong Kooi Ong and friends.

The offer is RM2.80 cash a Sunrise share, valuing the deal at RM1.39bil and includes UEM Land shares, or redeemable convertible preference shares alternatives instead of cash.

Analysts have largely hailed the deal and the rise in price of both shares has been cited as evidence for market acceptance for the deal. That may not be strictly correct as Sunrise's rise is purely due to the takeover offer.

UEM's share price before the announcement was RM2.26, Sunrise's was RM2.52 with dividends of 20 sen per share.

That puts the effective offer price at RM3.00 a share after taking out the 20 sen dividends. So definitely, there was upside to Sunrise as the offer was effectively about a 20% premium to market.

Also days before the suspension, Sunrise's share price was hovering around RM2.20, which indicates the deal was not such a close-kept secret after all. Using this price, the offer was a good 36% above the market price, a handsome premium indeed.

So it does not come as such a surprise that Tong accepted the deal. Faced with a dwindling land bank and marginalisation of his role as a property developer, he made the best decision for himself.

He not only got access to a whole lot of land bank but exited Sunrise at a very generous price effectively at a substantial premium to market.

He lost control of Sunrise but got the opportunity to play a major role in UEM Land, which if he plays well, will earn him lots from his minority stake in UEM Land.

Things are not that clear-cut for UEM Land though. Were they paying too much for Sunrise? Can't they have just bought professional expertise on a project-by-project basis instead of spending RM1.39bil to buy basically expertise and brand? Did they need the other assets that Sunrise had?

But still the UEM Land deal has to rate better than the one another GLC made with Sunrise earlier this year (see A Question of Business: Does Sime Darby need Sunrise? Feb 6).

Then Sime Darby entered into a 50:50 joint venture with Sunrise to undertake a RM1bil commercial development in Bukit Jelutong, Selangor.

The land belonging to Sime Darby was to be injected at a mere RM125 per sq ft into the joint venture when residential land in the area was already selling at more than that.

Now that Sunrise is going to be wholly owned by a GLC, that deal may seem a bit more palatable, although not to Sime Darby minority shareholders who still lose out.

Back to UEM Land, the deal is certainly better than what Sime Darby had cut with Sunrise because any benefit that accrues to Sunrise will accrue to UEM Land as well.

That reduces the question mainly to whether UEM Land is paying too much for Sunrise and whether it needed to pay for all the other assets that Sunrise had when what it was looking for was merely expertise.

History has repeatedly shown that it is possible to buy expertise in the form of professional project consultants, property experts, architects and others. Evaluation was key.

This was amply shown by the development of the Petronas twin towers. Tycoon T. Ananda Krishnan, who got the project started, had no major property expertise to speak of.

But he got the project going and off the drawing boards and it remains a landmark development. There are countless others before him who have done the same thing.

Why can't our GLCs do the same? But one thing is clear. Tong, despite Sunrise's dwindling land bank, is very much on the property scene using other companies' land banks.

No matter how he got there, that's a nice place to be. Question is, how much the two GLCs – first Sime Darby and now UEM – benefit from the tie-up with him.

·Managing editor P. Gunasegaram knows that land is more valuable than buildings and people more than both.

By The Star (by P. Gunasegaram)

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