It looked fishy from the beginning. When United Engineers Malaysia (UEM) announced in November it was paying $671 million for a 33% stake in Renong, its troubled parent, UEM shares immediately plunged by 54%. Analysts figured the deal was aimed at bailing out Renong's politically connected stockholders. Why else, they asked, would a relatively healthy builder of highways buy a stake in a floundering and heavily indebted holding company--in the midst of Asia's financial meltdown?
Now that UEM has issued its 1997 report, investors can judge whether the deal was as bad as it seemed. Sure enough: Half of UEM's shareholder equity has been wiped out by the $444 million plunge in the value of UEM's Renong shares. If it weren't for some unconventional accounting explained in footnotes to the Ernst & Young report, analysts reckon UEM would have lost $199 million in 1997, instead of the $74 million profit it reported. Meanwhile, debt has quintupled, to $653 million. "UEM used to have a very clean balance sheet," says senior analyst Kalai Pillay of Ratings Agency Malaysia. "But its value has been weakened considerably."
"WORRIED." The gutting of UEM should be a grim lesson for investors still scouring for "values" in Southeast Asia's bombed-out markets. Even if a company seems financially sound, there is the risk that it will be forced to take over corporate basket cases to benefit powerful insiders. In Malaysia, analysts also have raised doubts that the recent rescues of Siam Bank, steelmaker Perwaja Trengganu, and Malaysian Airline System are good for minority shareholders. Little wonder, says Choong Khuat Hock, an analyst at Caspian Research (Malaysia), that outside investors "have become very worried about bailouts."
A look at the UEM-Renong deal shows why the fear is well-founded. Both companies are headed by Halim Saad, who has close ties to the ruling party, the United Malays National Organization (UMNO), and is also a protege of Daim Zainuddin, Prime Minister Mahathir Mohamad's economic adviser. Last year's sharp devaluation of the ringgit caused a severe squeeze at Renong, which had borrowed heavily to invest in everything from telecom to rail projects. In the second half of 1997, Renong lost $86 million on sales of $143 million.
To investors' shock, UEM came to the rescue. The $1.1 billion company had been a favorite among foreign investors because of its low debt and lucrative assets, such as its concession to collect tolls until 2018 on the new 850-km expressway that it built across Malaysia--from Singapore to Thailand.
COLD OUTSIDE. Especially alarming was that nearly all of the shares that UEM bought were held in secretive nominee accounts. Although the identity of the Renong shareholders who sold to UEM was never made public, analysts assume they were close to the ruling party. After an outcry, the Finance Ministry said it would force UEM to make a general offer for all Renong shares at the Nov. 17 price of around 85 cents, as required by Malaysian law. But the ministry never followed through, reinforcing investor suspicions that the whole purpose of the deal was to bail out insiders before Renong tanked. Halim has claimed politics weren't involved and that UEM bought the shares on the open market. Malaysian stockbrokers insist they were purchased through private placements. UEM and Renong officials didn't respond to interview requests.
The big losers are investors who were left holding UEM shares, which have plunged by 62%, and UEM itself. Caspian Research says the company has only enough cash--$59 million--to service its debt through July. And it could lose its entire investment in Renong, which is still in danger of collapsing from the $922 million in foreign debt that comes due over the next two years. To raise cash, Renong has been trying unsuccessfully to sell more than 8,000 hectares of land around Second Crossing bridge to Singapore. Meanwhile, UEM is trying to unload its crown jewel, the North-South Expressway. That would help get UEM out of trouble. But for stockholders who have hung on to UEM shares hoping for a rebound, liquidation would be the final insult. It takes a crisis to find out who really counts in Malaysia Inc.