Business

Wednesday October 28, 2009

Tradewinds’ debt-ridden future

Raison D'Etre - By Risen Jayaselan


HAVING too much debt can never be a good thing. This is especially so in tough economic conditions. If business isn’t great, cash flows can be affected and that in turn can impact the ability to service high debt levels. That in turn can impact dividend payments and, worse, cause one’s bankers to re-look the situation.

If bankers panic, they can call on loans and if they do that, companies can slide into a downward spiral as all stakeholders, from suppliers to investors to employees, may begin to withdraw their support for the company.

When seen in this light, Tradewinds (M) Bhd’s proposed takeover of Padiberas Nasional Bhd (Bernas) is a worrying development. That is not to say that Tradewinds’ debts will be its downfall. But it sure is looking like a weighty risk.

Consider this: With the acquisition of Bernas, Tradewinds’ debts will balloon to a whopping RM2.2bil. If you include the debts of Bernas into the picture, the total debt figure will surpass RM3bil, giving the merged entity a net gearing ratio of 2.02 times, more than double Tradewinds’ net gearing ratio of 0.82 times as at the end of last year.

This is why in its circular to shareholders, Tradewinds admitted that the acquisition would negatively impact its (Tradewinds’) dividend payments.

But Tradewinds said that was only a short-term problem.

In the longer term, Bernas’ earnings contributions will help Tradewinds pay better dividends. That may well be the case, although that claim must be seen in light of the fact that Bernas has a chequered earnings track record.

It recorded a loss of RM76mil in the financial year ended Dec 31, 2008 (FY08) due to high rice prices in the international market and escalating fuel costs.

Its performance has improved though, as it recorded a RM75.8mil after-tax profit for the first half of FY09.

Still, it is unlikely that the dividends from Bernas (to Tradewinds, post-acquisition) will be sufficient to offset the large debt that Tradewinds will be incurring as a result of this acquisition.

The rationale for the buying Bernas is to gain control of the country’s sole rice importer as well as to tap on Bernas’ marketing and distribution networks around the country. Tradewinds is involved in oil palm cultivation and sugar manufacturing.

While these are sound reasons, one wonders if the deal can be better structured i.e. with less debt involved. For example, why isn’t Tradewinds seeking to raise internally-generated funds for the acquisition? After all, Tradewinds did state in its circular to shareholders that it had identified possible ways of raising RM330mil by disposing non-core assets. It said this would be done at a later stage to offset its debt. But why not do that first before acquiring Bernas?

Secondly, Tradewinds’ major shareholder, Tan Sri Syed Mokhtar Al-Bukhary, owes the company close to RM200mil. (He is linked to Bukhary Sdn Bhd, which sells the sugar produced by Tradewinds, which owes Tradewinds RM193.9mil.) If this amount is collected, then, together with the sale of non-core assets, a total of RM500mil can be raised.

It is going to cost Tradewinds RM526mil to buy a block of 53.6% of Bernas from two parties.

This triggered a mandatory general offer (MGO) for the rest of Bernas shares.

While Tradewinds had sought a waiver for making the MGO, that was denied by the authorities, leaving Tradewinds facing the likelihood of having to fork out another RM453mil for the rest of Bernas’ shares.

Here’s another idea that Tradewinds should consider: While making the MGO, it can place out Bernas shares to interested institutional investors in a way that it will not have to fork out money for the MGO.

As things stand, Tradewinds faces a debt-laden future, which can never be a good thing, especially in these tough times.

·Risen Jayaseelan is deputy news editor. He feels Tradewinds’ minority shareholders are getting a raw deal from their company’s proposed acquisition of Bernas, considering the hefty debts that are going to be incurred.

 
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