Water Stocks Fall as Buyout Talks Collapse: Kuala Lumpur Mover

Kumpulan Perangsang Selangor Bhd. led Malaysian concessionaires lower as Selangor’s state government said it may invoke a compulsory nationalization of their water assets after negotiations on terms failed.

Kumpulan Perangsang fell 3.1 percent to close at 1.88 ringgit in Kuala Lumpur after earlier dropping as much as 5.7 percent. Puncak Niaga Holdings Bhd. declined 1.8 percent to close at 3.35 ringgit, while Gamuda Bhd. ended down 0.2 percent at 4.52 ringgit. The benchmark FTSE Bursa Malaysia KLCI Index was 0.1 percent lower.

Malaysia’s local and federal governments said they may invoke 2006 legislation to terminate water privatization in Selangor state, which surrounds Kuala Lumpur. This comes after five years of negotiations with concessionaires to agree terms for their assets ended. Deputy Prime Minister Muhyiddin Yassin will head a panel to decide how best to proceed, including legal and financial implications, Maximus Johnity Ongkili, the minister overseeing water, said in an e-mailed statement.

“This step is taken in the country’s interest to ensure that water supply is not disrupted,” Ongkili said. The law “allows the federal government to take over the operations of the concessionaires for an interim period.”

Kumpulan Perangsang and Puncak Niaga issued stock exchange filings late yesterday confirming that talks had ended. Kumpulan Perangsang said it will seek legal advice and evaluate implications of any forced sale. Gamuda hasn’t responded.

‘Big Blow’

This is a “big blow to the water players as they were holding out for better terms compared to the fifth and latest offer made in November,” AMMB Holdings Bhd. wrote in a research report today. “With the invocation, it is uncertain if the terms of the offer still stand.”

The bank maintained its neutral rating for the water industry, with a hold call on Puncak Niaga and fair value of 3.40 ringgit.

Selangor’s state government had offered a total 9.7 billion ringgit ($2.9 billion) for the companies’ water assets, Sharizan Rosely, an analyst at CIMB Group Holdings Bhd., wrote in a report today. It set a Dec. 31 deadline to agree terms, according to exchange filings at the time.

“This is a positive surprise as the takeover talks with the state government had recently hit a brick wall,” Sharizan said. “The Federal government’s intervention will jump-start the restructuring.”

Investors should accumulate Puncak Niaga and Gamuda shares as they may benefit from any renegotiation of valuations, Sharizan said. He has target prices of 3.83 ringgit for Puncak Niaga and 5.58 ringgit for Gamuda, according to the report.

RHB Capital Bhd. said it is maintaining its buy call for Puncak Niaga for now, though could later lower its fair value from 5.22 ringgit to 3.87 ringgit in a worst case scenario if the government pays less than expected for its assets, analyst Kong Heng Siong wrote in a report today.

“We believe it is too early to draw any conclusions pending confirmation of the details of the offer from the Federal government,” Kong said.

Before it's here, it's on the Bloomberg Terminal.