After The Super-Merger Will Others Follow ?

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Nov 23 2006
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Three of Malaysia’s largest palm oil producers – Kumpulan Guthrie Berhad (GUTHRIE : stock-code 3131), Sime Darby Berhad (SIME : stock-code 4197) and Golden Hope Plantations Berhad (GHOPE : stock-code 1953) are to merge, potentially create the world’s biggest bio-fuels company and its largest publicly-traded palm oil entity.

All three stocks halted trading in their shares and listed subsidiaries Thursday and will resume trading next Tuesday. The deal will create the biggest listed palm oil producer in the world in terms of output and market value under a new company called Synergy Drive.

The merger is expected to go through smooth as all three of them are under the government fund manager Permodalan Nasional Berhad (PNB) umbrella.

Malaysia is the world’s biggest palm oil producer, and its companies are also big players in neighboring Indonesia, another major producer of the edible oil. Palm oil and soybean oil are the world’s top edible oils, but palm oil is becoming a top ingredient in bio-fuel as well.

A combination of the three companies’ palm oil businesses will yield annual revenue of at least $2.02 billion and yearly operating profit of around $248 million. The three companies also have a total 1.3 million acres of land in Malaysia and Indonesia planted with oil palm, producing more than 2.1 million tons of crude palm oil annually.

This is indeed a good initiative to create a more synergy, efficient and cost-effectiveness under one umbrella to bring more value to shareholders and investors – if the intentions are as stated. But there might be some other issues post-merger such as leadership, retrenchment, staffs morale, culture adaption, productivity interruption etc. Are there any politic strings being pulled behind this merger ? Why the sudden talk about cost-cutting and efficiency, after so many years ? Who will ultimately lead the new company will give some clues on the actual story behind this mega-merger.

With this super-merger, what will happen to other players in the same sector ? Will there be more mergers in the near future just like the financial banking institution consolidation exercise post-1997 Asia Economic Crisis ? Let’s look at the other main plantations companies (together with its’ market capitalization as of today’s, 23-Nov-2006, stocks closing price) – there might be some other stocks which are direct or indirectly related to palm oils business which I might not cover here.
  • IOI Corporation Berhad – RM 23.0 billion
  • Kuala Lumpur Kepong Berhad – RM 9.8 billion
  • PPB Oil Palms Berhad – RM 4.2 billion
  • Batu Kawan Berhad – RM 3.2 billion
  • Asiatic Development Berhad – RM 3.0 billion
  • United Plantations Berhad – RM 1.8 billion
  • Kulim (M) Berhad – RM 1.47 billion
  • Tradewinds Plantation Berhad – RM 1.0 billion
  • Kwantas Corporation Berhad – RM 636 million
  • United Malacca Berhad – RM 621 million
  • Far East Holdings Berhad – RM 542 million
  • Sarawak Oil Palms Berhad – RM 370 million
  • Tanah Emas Corporation Berhad – RM 137 million

So, can anyone guess which of the above plantation companies have the potential of another round of merger ? There might be money to be made if your guess is right by investing in that stock. I think the potentials are probably on the smallest companies being acquired unless the history of “small fish” eating up “bigger fish” repeats again. What do you think ?

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