Deals

Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

1Malaysia Development would like nothing better than to slink out of the headlines, especially the kind that put the state investment company at the center of an unseemly saga of political intrigue and public outrage.

1MDB's Energy Portfolio
1MDB's energy subsidiaries have a net power generation capacity of 5,594 megawatts, with about 3,112 megawatts in Malaysia and 2,482 megawatts overseas
Source: 1MDB

That wish may come true if a Chinese-Qatari group delivers a much-anticipated bid for 1MDB's power assets, which will allow the debt-addled company to start winding itself down. But for any foreign investor to rush headlong into Malaysia's electricity generation business will require either blind courage or strategic sophistication.

At first glance, China General Nuclear Power's expected 10 billion ringgit ($2.3 billion) joint bid with Qatar's Nebras Power smacks more of recklessness than foresight. Tenaga Nasional, the state-owned Malaysian utility, is believed to have made an offer 20 percent lower for the same assets. Considering the 30 percent jump in Tenaga's share price since August, it appears investors are relieved the utility wasn't arm-twisted by the government into rescuing 1MDB at a bloated valuation.

Relief Rally?
Investors in both 1MDB's notes and Tenaga's stock are having a good quarter
Source: Prices compiled by Bloomberg

Why are the Chinese so eager?

At present, Malaysian law doesn't permit foreigners to own more than 49 percent of power generation businesses. Even if that rule is relaxed, the new investors will find themselves in an industry where, as a buyer, Tenaga calls the shots. The days of outsize returns to private investors from running independent power stations are long over. China General, which just last month promised a 6 billion pound ($9.1 billion) investment in Britain's first new nuclear power plant in three decades, must expect its toehold in Malaysia to lead to a similar outcome. If bagging the license to build and run the country's first nuclear plant is the ultimate prize, then paying a couple of billion over what 1MDB's assets are worth might start to make sense.

 1MDB can hardly complain about its first decent chance to ride into the sunset.  A plan to list its power assets didn't go anywhere and in January, the company flirted with default after delaying payment on a 2 billion ringgit loan. Then came doubts about the company's financial assets. President Arul Kandasamy insists that all of 1MDB's money is accounted for, including the $2.33 billion parked in the Cayman Islands after an aborted joint venture with PetroSaudi International. Prime Minister Najib Razak has also denied that any 1MDB funds wound up in his personal bank accounts, an allegation first made by the Wall Street Journal. And yet critics, including former Prime Minister Mahathir Mohamad, refuse to give up.

Debt Burden

Cash from the Chinese would surely help boost liquidity at 1MDB, which post any power sale would still hold another 10-12 billion ringgit in property assets. With luck, the company will be able to pay bondholders in full, and more importantly, that money won't come out of another state institution's coffers. At least, that's the outcome financial investors seem to be betting on. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Andy Mukherjee in Singapore at amukherjee@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net