Friday, June 4, 2010

Khazanah heads overseas with Parkway

KUALA LUMPUR/SINGAPORE: Malaysian state fund Khazanah's US$835 million bid for Parkway may signal the start of more focused, major acquisitions abroad to help Malaysia Inc venture beyond its cosy home market.

Khazanah's biggest foreign acquisition aims to double its stake in Parkway Holdings, Asia's biggest listed hospitals operator which owns Mount Elizabeth and Gleneagles hospital in Singapore, and manages chains in India and China.

The move, which caught potential suitor India's Fortis Healthcare and the market by surprise, has drawn attention to the strategy of Khazanah, whose US$28 billion assets are mostly concentrated in Southeast Asian financials, healthcare and telecoms.

"It's consistent with their (Khazanah's) strategic thrust to be in healthcare," said Michael Lai, associate director of investment at Fortress Capital Asset Management.

He said Khazanah's move gave it first mover advantage over Fortis.

"Healthcare assets are quite lucrative in this part of the world. I think it is a bit of a strategy whereby if someone wants to buy over my assets and I don't want to sell, I might as well offer first," said Lai, who helps to manage about RM200 million at Fortress.

The Malaysian fund's mandate is to make strategic investments on behalf of Southeast Asia's third-biggest economy, and also oversee a programme to transform state-owned companies beset by inefficiencies into global players.

Khazanah has been less aggressive than Singapore state funds GIC and Temasek, which hold assets totalling over US$400 billion and have invested in Western banks and real estate.

The Parkway bid has put some investment banks, hungry for more deals from the Malaysian government, in a bind and could make them less keen to pitch for a mandate from Fortis.

"Anyone who has a franchise here would find it very hard to challenge the Malaysian government," said a Singapore-based banker, who asked not to be named.

Khazanah's move comes as the Malaysian government, in a bid to revive the country's stock market, pledged to lure foreign portfolio funds back by increasing the market's free-float.

The fund was told to progressively divest its non-core assets and last year, made a total of eight divestments worth RM3.1 billion. It has said the asset sale programme will continue this year.

Warchest may grow
Khazanah is not bulging with cash unlike the deep pocketed Government of Singapore Investment Corp (GIC) with its US$300 billion in assets or multi-billion-dollar Chinese and Middle Eastern funds.

It does not receive a constant supply of surplus cash from the Malaysian government, itself struggling to cope with persistent fiscal deficits. Instead, it relies on dividend income and gains from stake sales, mirroring Singapore's Temasek.

But with the Malaysian government looking to cut Khazanah's stakes in state-owned firms as part of broad economic reforms, the fund may have a bigger warchest to do more deals. The fund does not disclose details of its cash holdings.

Deutsche Bank estimates Khazanah's exposure in the market as of late last year represented 8% of MSCI Malaysia component stocks.

These are meaningful in large-cap companies such as a 28% stake in top Malaysian dealmaker CIMB, state utility Tenaga and a 45% stake in mobile phone operator Axiata.

"They still have a big balance sheet. If they think something is strategic like healthcare, they will look at it," said a banker, who has covered the fund.

"Their main focus is Malaysia and Southeast Asia, but they do look at stuff in China, India and the Middle East."

Bankers said Khazanah may also look at telecom and banks, but are likely to back Axiata or CIMB for such ventures.

Khazanah is led by Azman Mokhtar, who was appointed as managing director in 2004 by former Malaysian Prime Minister Abdullah Ahmad Badawi.

Azman, a former British Chevening scholar and ex-head of research at the Malaysian operations of UBS and Salomon Smith Barney, is aided by seven executive directors of investment, most of them with a banking background.

Khazanah's investments have been restricted to Asia. It wasn't one of the sovereign wealth funds that invested in struggling US banks during the credit crunch in 2008 like Temasek which is becoming more of an investment company.

"Khazanah is moving more of their investments outside of Malaysia. But their strategic role is still very much in place ' to develop Malaysia Inc," said Lim Jit Soon, head of equities research Southeast Asia, at Nomura Securities. ' Reuters

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