MERGERS and acquisitions (M&As) are an essential and healthy part of a dynamic capital market.

       In current times, when the prices of some listed companies are depressed, one would expect more privatisation exercises to take place.

       The typical scenario is usually when a major shareholder believes that the market is undervaluing his company and if he could buy back his company, he would be able to extract more value out of the group. Or it could be a third party embarking on such a buyout.

       In most of these cases, the buyers would seek funding from financial institutions to embark on those buyouts.

       However, industry sources say that banks have become less inclined to fund buyouts as they have upped their credit evaluation in light of tough economic conditions.

       “Banks, as part of their credit evaluation, are needing to see certainty of cash flows before they can grant funding for any M&A exercises,” points out an investment banker.

       The dwindling number of privatisations point to this.

       In the last eight months, only three privatisations have taken place on Bursa Malaysia. There were seven last year and 11 in 2019, of which three deals did not pull through.

       Another banker explains that the heyday of leveraged buyouts, when corporate raiders had a free reign to seek funding to buyout companies and strip assets, pay back the loans and still get away with a handsome return, are coming to an end, at least in Malaysia.

       “When the funding stops, the party ends,” he enthuses.

       The view is backed by Wong Muh Rong, who runs boutique corporate advisory firm Astramina Advisory Sdn Bhd.

       In the past, the founder of Astramina has been involved in a number of privatisation deals such as Malakoff Corp Bhd, Road Builder Bhd and Magnum Bhd, explains Wong.

       In today’s environment, securing funding from financial institutions is a challenge.

       “As part of their due process, they scrutinise the deal more than ever to as they need certainty of cashflows for repayment before granting any funding for privatisation and other M&A exercises.

       “Financial institutions are now focused on the company’s sources of repayments for any funding granted for M&A activities.

       “Any divestment plans or initial public offerings (IPOs) which have capital market elements are only considered as secondary sources of repayment for any lending because it comes with capital market risks in uncertain market conditions such as now with the Covid-19 pandemic,” she says.

       Wong points out that banks are looking for parties to fund the repayment for their privatisation deals from the businesses cash flow and operational profits of the target companies and not from say the sales of assets which may not materialise.

       It appears that repayment abilities of companies have become a key criteria for banks to assess any lending.

       “They do not like bullet payments, they need clear sources of repayments. This is why market funding of privatisations is seeing a decline as banks see it as a risk to fund companies to privatise in the current market condition,” says Wong.

       The most recent cast of a privatisation deal completed was TA Enterprise Bhd, which was taken off the Main Market of Bursa Malaysia in March.

       Other ongoing privatisation deals for this year are MMC Corp Bhd and Amcorp Properties Bhd, pending completion of the exercise.

       Last year, other companies that were delisted included MB World Group Bhd, Caring Pharmacy Group Bhd, Amverton Bhd.

       Although banks are less declined to fund privatisation deals, there are opportunities open for funding from private equity firms teaming up with owners to privatise companies.

       One example of this was the privatisation of Yee Lee Corp by its founder Datuk Lim Ah Heng, which was backed by Singapore-based private equity firm Dymon Asia.

       Fortress Capital Asset Management chief executive officer (CEO) Thomas Yong

       In the near-term, Fortress Capital Asset Management chief executive officer (CEO) Thomas Yong believes the dip in privatisation deals is likely to happen as he does not think that valuations are low enough to attract buyouts.

       This he says is due to the low interest rate phenomenon which in turn has nudged up equity valuations in almost all stock markets. And things will not change as interest rates are likely to stay low for an extended period of time.

       However, he says whether the trend would persist depends on the dynamics and buoyancy of market sentiments and valuations.

       “The drop in privatisation deals is likely attributed by the earlier buoyant equity sentiments both domestically and internationally where equity valuations rose sharply, and also banks’ growing conservatism in new loans,” says Yong.

       Meanwhile, for private equity firms flush with cash scanning the stock market for buyout opportunities, there are not that many deals worth pursuing.

       “It is not easy to find a company which has the potential for much growth and which is reasonably cheap.

       “Most good companies are highly valued and the ones that are cheap, well they may not meet our criteria. But we are definitely on the lookout,” says one CEO of a large Malaysian based private equity firm.