YTL Power poised for mergers & aquisitions

The STAR Online , October 17, 2008

It has large war chest to make move in this time of economic distress

“THE journey continues ...” as the buzzword on YTL Power International Bhd’s 2007 annual report put it.

The group has journeyed to faraway markets for opportunities, enabling it to expand its business to Britain, Australia and Indonesia. That also led it to broaden its business base to include water supply and sewerage services, and power transmission.

It had last made an acquisition many years ago, tending to acquire utility assets only from distressed sellers.

Besides aiming to acquire good assets at relatively low prices, the group also has an excellent track record in managing organic growth of the businesses acquired.

Hence, starting from a business base of two power stations in Malaysia, it expanded that to include water and sewerage services in Britain from which it earns more profits than at its home base.

It reported an operating profit of RM1.4bil from its water and sewerage services division compared with RM483mil from power generation in its financial year ended June 30. This is a group that has made good in growing from its roots in Malaysia.

YTL Power last reported it held gross cash of over RM9bil that it could use to acquire more assets. It would seem obvious that it would make a major acquisition of a utility in this cycle of widespread distress.

It has a large enough war chest for that, and it has waited many years for such times of desolation.

Besides its own internally-generated funds, it had wisely raised US$250mil through an exchangeable bond at a time when credit markets were easy and interest rates were lower. The cash from the bond issue is being held for investments in utility assets.

At this time of credit crunch, it will be difficult to obtain financing for acquisitions even when attractive utility assets are available. Hence, the fund raising ahead of a turn in the credit cycle was an act of foresight.

Berkshire Hathaway Inc, managed by Warren Buffett, is also known to raise funds when terms are easy even when there are no immediate use of the funds.

YTL Power, which has fairly stable earnings from its utility businesses, offers a yield of over 6% and, including distribution of free treasury shares, the yield can be as high as 10%.

When the group makes its move, it can be anticipated that the acquired asset will not only be enhancing to its earnings but also a new base from which it can grow a new asset.