Sime Says Eastern and Oriental Acquisition May Boost Earnings

Sime Darby Bhd. (SIME), the world’s biggest publicly traded palm oil producer, said the acquisition of a 30 percent stake in Malaysian property developer Eastern and Oriental Bhd. may boost earnings.

“Taking on this 30 percent stake, at the stroke of a pen, we have property market presence in three key areas -- Klang Valley, Penang and Johor,” Sime Group Chief Executive Officer Mohd Bakke Salleh said in an interview yesterday. “We’re looking at this company as a brand that we can latch onto and also benefit from particularly in terms of high-end, niche development, hospitality business and more importantly, the entrepreneurial way of things.”

Buying the 766 million ringgit ($243 million) stake makes Sime the largest shareholder in the developer, which has land holdings in the northern state of Penang and the southern Johor state. The purchase may boost Sime’s earnings by 28.9 million ringgit in fiscal 2012, rising to 51.6 million ringgit in fiscal 2014, UOB-Kay Hian Holdings Ltd. said Aug. 29.

Sime’s shares have dropped 7.3 percent this year in Kuala Lumpur, while Eastern and Oriental gained 27 percent. The company agreed on Aug. 29 to buy 273 million shares in Eastern and Oriental at 2.30 ringgit each. That was 59 percent more than its last close of 1.45 ringgit on Aug. 25.

Loss Making

The company’s plan to expand its property division comes three months after it sold two fabrication yards for 695 million ringgit, quitting its loss-making oil and gas business. Sime, which counts property development as one of its six main businesses, swung to a fourth-quarter profit of 1.31 billion ringgit in the three months ended June 30, compared with a loss of 77.4 million a year earlier.

Sime may be forced by the Securities Commission to make a mandatory general offer, or full takeover, for Eastern and Oriental as the company, together with the three shareholders who sold the 30 percent stake, have about 41 percent equity interest, the Edge Financial Daily reported on Sept. 13, citing market talk.

“This story actually caught on and it spread like wildfire and people believed in it,” Mohd Bakke said. “Currently, it doesn’t even cross our mind, because we decided just to take a stake below the mandatory trigger level.”

Any general offer wouldn’t have implications on dividend payment ability or hurt earnings as the company’s gearing at 0.3 is “very low,” Bakke said. Sime was open to the possibility of making a general offer in the future, he said.

Sime rose to a one-week high yesterday after UOB-Kay Hian said concerns the company paid too much for its stake and that it may make a possible general offer for the rest of the property developer were “overblown.”

“We would like to reiterate that we are examining the circumstances surrounding the transaction for any Takeover Code implications,” the Securities Commission Malaysia said in a statement on its website on Sept. 12. “We are also reviewing all stock transactions by all parties over the relevant period related to this matter. The outcome of these two reviews will only be known after all the relevant facts have been established.”

To contact the reporters on this story: Ranjeetha Pakiam in Kuala Lumpur at rpakiam@bloomberg.net

To contact the editor responsible for this story: Rebecca Keenan in Hong Kong at rkeenan5@bloomberg.net

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