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KUALA LUMPUR (Oct 6): News of the proposed merger between UEM Sunrise Bhd and Eco World Development Group Bhd (EcoWorld), which will form one of Malaysia’s largest real estate companies by market value, caused quite a stir in the market yesterday.
Below is what Tengku Datuk Seri Azmil Zahruddin, President of UEM Group Bhd, parent of UEM Sunrise, said via email interview with The Edge on the matter:
The Edge: How did UEM Group come to the conclusion that UEM Sunrise should merge with EcoWorld, rather than other local developers, especially other government-linked companies (GLC)?
Tengku Datuk Seri Azmil Zahruddin, UEM Group President: We have seen a wave of consolidation among property developers in some of the other markets in the region, notably China, Thailand and India, generally driven by the fact that the larger players they tend to be stronger, generating higher returns and margins. The Malaysian real estate market has been challenging, with a significant cantilever in most segments in recent years. The situation has been made even more challenging by Covid-19. The environment seems conducive to consolidation.
In this context, we have been looking for a suitable partner for UEM Sunrise. UEM Sunrise has a particular set of challenges: geographically, it is mainly concentrated in the southern region, while in terms of skills and experience, it is relatively strong in skyscrapers and the central region. Therefore, we wanted to find a partner that could help address some of these challenges.
We looked at several potential opportunities, but based on facts, data, and our evaluation, we felt that EcoWorld was the right fit. EcoWorld is one of the strongest brands on the market, with a considerable following and a presence throughout Peninsular Malaysia.
We view the proposed merger as an opportunity for an existing government-linked company to partner with the private sector to create one of the largest real estate developers in Malaysia with total land of more than 17,000 acres locally.
The Edge: Who came up with this idea? – UEM Group or EcoWorld? Has the UEM Group received a green light from Khazanah Nasional Bhd on the proposed merger?
Azmil: The letter sent to both companies to consider and deliberate on a possible merger was issued by UEM Group. Khazanah is aware of this and supports it.
The Edge: Who will lead the management of the merged entity? Why?
Azmil: The composition of the board of directors and the management team will be decided by the Integration Committee. We are proposing that the president of the merged entity come from UEM Sunrise.
The Edge: Is EcoWorld Chairman Tan Sri Liew Kee Sin committed to remaining a shareholder in the merged entity and on its management team?
Azmil: We cannot speak on his behalf. You may want to ask the question.
Analysts at The Edge: Investment say there are hardly any synergies from the proposed merger. What do you say to this?
Azmil: In addition to allowing UEM Sunrise to reduce its over-reliance on Johor exposure from 75% to 63%, the proposed merger will improve its central land bank from 5% to 20%. As mentioned, EcoWorld has a particularly strong brand and strong customer base. It is one of the most respected real estate developers in the country, with a solid reputation as a municipal developer and a credible track record in the entire range of real estate products, ranging from residential to industrial parks.
Importantly, despite its balanced land bank, it also has a proven track record in Johor. On the other hand, from the perspective of EcoWorld shareholders, the proposed merger will give them access to UEM Sunrise’s extensive land bank and a strong track record in the high-rise residential sector. [development].
Building on the strengths of both parties, we believe that the merged entity will be well positioned to better serve its clients.
The Edge: Will you embark on any streamlining exercises, for example downsizing the workforce and streamlining operations, to achieve greater efficiency?
Azmil: I think it’s important to emphasize here that, in our opinion, the merger is based on expected performance and the prospect of improved revenue; we expect better land use through product optimization. We have not assumed any profitability in our merger case.
The Edge: Simply put, the proposed merger has received criticism. Some sectors see it as a bailout of EcoWorld with taxpayer money.
Azmil: This is not a ransom. The main premise of this proposed merger is that UEM Sunrise and EcoWorld build on each other’s strengths. These include UEM Sunrise’s sizeable land bank and EcoWorld’s outstanding track record and execution capabilities, to create best-in-class property developer with strong capabilities in every industry segment for the benefit of all shareholders and buyers of properties.
EcoWorld had healthy unbilled sales of up to RM3.4 billion as of August 31, 2020; its net leverage was reduced from 0.7x in October 2019 to 0.6x in July 2020. Additionally, EcoWorld’s April to mid-June sales of RM642 million were higher than the second quarter 2020 peer average of RM257 millions. EcoWorld’s current net debt on unbilled sales of 0.9x is less compared to UEM Sunrise’s 1.6x and 1.3x peer average.
The Edge: How confident are you that the proposed merger will materialize despite the criticism against it?
Azmil: This is a proposal for consideration by the respective boards of directors of UEM Sunrise and EcoWorld, and we hope that they will see the commercial benefits of this merger, as do we.
The Edge: Are you expecting more consolidations in real estate?
Azmil: We wouldn’t be surprised if we end up seeing more consolidations in the industry. Such consolidations will make more sense for players with complementary strengths and capabilities that can generate synergies and create more value for shareholders.
Read also:
UEM Sunrise proposes a merger with EcoWorld in a share swap deal, confirming The Edge report
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