The Proton saga continues

Interestingly, the announcements on Proton’s seemingly imminent sale — and even the likely buyer — are coming from Dr Mahathir, who is an adviser to Proton, rather than its major shareholder — Khazanah, which has been rather quiet throughout the episode.

Written by Joanne Nayagam, The Edge    

The Proton-DRB-Khazanah saga continued yesterday with Proton Holdings Bhd issuing a statement saying that Khazanah Nasional Bhd, “in its normal course of business, it regularly receives proposals, enquiries and expressions of interests in relation to its various investments and companies where it has interest in, including Proton. Khazanah will make necessary disclosure at the appropriate time”.

Khazanah neither denied nor confirmed the rumour of the sale of its 42.7% equity stake in Proton to DRB-Hicom Bhd.

This was the second statement from Proton in a week, although it sent a clearer signal that something may be brewing at the national carmaker.

On Dec 6, in a response to an article in The Edge, Proton had flatly denied any corporate development. It announced to Bursa Malaysia that “after making due enquiry with the board of directors and major shareholders, the company is not aware of any reason for the unusual market activity in its shares and that there is no material corporate development not previously disclosed”.

Meanwhile, DRB-Hicom did not acknowledge that it is keen on buying into the national carmaker. The conglomerate had last week denied the speculation of it acquiring an equity stake in Proton.

Proton needs a strategic partner to ensure it thrives in an increasingly competitive environment.

Proton’s announcement came after the comments made by former prime minister Tun Dr Mahathir Mohamad that DRB-Hicom “is likely to win the bid for Khazanah’s equity interest in Proton” on Monday.

Interestingly, the announcements on Proton’s seemingly imminent sale — and even the likely buyer — are coming from Dr Mahathir, who is an adviser to Proton, rather than its major shareholder — Khazanah, which has been rather quiet throughout the episode.

The Edge weekly reported over a week ago that Khazanah might sell its stake in Proton to DRB-Hicom, which also assembles cars for Suzuki, Mercedes-Benz and global car maker Volkswagen AG (VW).

It is a well-known secret that Khazanah has been looking for a suitor for its majority stake in Proton, in which the the former does not have a board representative despite being the major shareholder.

In 2006, VW was interested in purchasing Khazanah’s stake in Proton, but the plan hit a snag due to what some said was nationalistic interest.

Three years later in 2009, DRB-Hicom approached Proton and submitted a bid to buy 32% of Proton shares. Again, the talks failed for reasons unknown. Today, Proton is not exactly in the pink of health.

Proton’s net profit fell 76% to RM15.6 million for 2QFY12 ended Sept 30 from RM65.9 million a year earlier due to higher expenses incurred by Lotus Group. Likewise, its 1HFY12 earnings took a sharp 86.6% fall to RM20.1 million from RM150 million a year earlier.

As at Sept 30, Proton had RM1.31 billion in cash, bank balances and deposits. Its short-term and long-term borrowings grew 158% to RM959.1 million compared with RM371.2 million six months earlier. Proton is in the second year of a five-year turnaround plan for Lotus Group that costs £480 million (RM2.35 billion).

However, if Khazanah didn’t sell its stake in 2006, one might wonder why the rush now, indeed? And why narrow the potential buyers to only a few local parties?

Would it not be better to have a tender exercise open to global auto players as well? Limiting the pool of buyers will not get Khazanah the best price, or a partner for Proton that will ensure it thrives.

Proton could definitely use a helping hand given its current weakening financial position, but certainly there should be no rush to make a transaction of such size and importance.

Recently, DRB-Hicom in an announcement to Bursa refuted claims that it is looking to secure a substantial stake in Proton and would later divest part of the stake to VW.

This wasn’t exactly a denial of the possibility that it could buy Khazanah’s stake and simply not sell it.
If VW had expressed interest in Proton five years ago, surely it has some ideas on how to turn the company around. Was it even approached now?

If Khazanah is indeed interested in potential buyers for its stake, the national sovereign wealth fund should open up the bids in a more transparent manner for a longer period of time.

This is especially since Proton is currently trading below its book value per share of RM9.81, net tangible assets per share of RM7.62 as well as Khazanah’s estimated cost of above RM8 per share.

Proton can rely on bigger automotive players to not only invest money in the national carmaker, but also to lend research and development (R&D) capabilities, something which DRB-Hicom can not offer.

When contacted by The Edge Financial Daily, Aberdeeen Asset Management fund manager Abdul Jalil Rasheed said: “A lot of the car manufacturing brands are owned by one company, where divisions like R&D are shared by all the different divisions within the company”.

If a significantly large auto player like VW were to have a stake in Proton, the local carmaker could stand to gain substantially from its R&D capabilities.

Back in its heyday from the mid-1980s to the mid-1990s, almost every Malaysian had a Proton car.

Fast forward to 2011 and Proton is seeing a decline in its market share, despite strong protectionist policies that result in hefty taxes and Malaysia having some of the highest car prices in the world.

Thanks to economies of scale and continuous investments in R&D, there are plenty of foreign carmakers that are selling much nicer cars, priced not much higher than Proton here and far cheaper overseas.

This is Proton’s biggest challenge. Jalil said the more pertinent question at this time is not if Khazanah were to sell its Proton stake to DRB-Hicom, but if Proton can just survive by being Proton.

With all three parties neither denying nor agreeing to the claims of the sale of Proton, it really is anyone’s guess how the saga will further develop.

Proton’s existing management is also said to have expressed interest in a management buyout, with the proposal spearheaded by its chairman Datuk Seri Mohd Nadzmi Mohd Salleh, and its CEO Datuk Seri Syed Zainal Abidin Syed Mohamad Tahir.

However, on a brighter note for Proton, the group has seen some interest in its shares of late.

Yesterday, Proton closed at RM4.27, four sen higher than Monday’s close.