Hyflux’s White Knight In Medco & Salim Group. Here’s What You Should Know About The Deal
Hyflux is one among the leading global water treatment companies. The company has water treatment plants all over the world. Founded by Olivia Lum, the company also involves itself in water desalination all over the world. However, the recent months are proving momentous for the company as it grapples with a $2.95 billion debt.
Due to prolonged weakness in the local market, the company claims incurring huge debts. The dents mounted so high that Hyflux applied for “court-supervised” process for debt restructuring. According to the company’s CEO and founder Ms Lum, weak markets led to sharp liquidity constraints.
In a letter to investors, Ms Lum assured investors that the company would look to strategic partners for help. Therefore, after weeks of scrutiny, the company settled on SM Investments consortium.
Fresh capital injection
Reuters reports that the SM Investment consortium agreed to inject $530 million into the company. Basically, this amount will serve to resuscitate the business and get it running. This deal is one of the most important in the Singapore market considering the weight it carries. Also, Hyflux is a very important company that just eight years ago was a star in the business.
As per the details from the deal, SM will acquire 60% of Hyflux for about $290 million. SM Investments Pte is a joint venture between Salim Group and Medco Group. All of the two companies are giants in the Indonesian market.
Further, part of the deal involves SM investments extending a S$130 million loan to Hyflux. This will act as the interim operating capital as the firm slowly stumbles to its feet. In a statement, Hyflux said that the loan will help the company to run essential business until the deal finalizes. Also, this is part of a commitment package from the new majority shareholder, SM Investments.
Olivia Lum is confident that the new strategic partner has the best interests of Hyflux at heart. This is because Hyflux conducted a very thorough vetting of all potential suitors and found SM to be worthy. Speaking on the sidelines of the deal signing ceremony, Ms Lum said:
“It is an entire board decision, we have undergone a very vigorous exercise in selecting the best investors for the company, as well as for all the creditors and stakeholders.”
Protection by the court
Before signing the deal with SM Investments, Hyflux had existing non-disclosure agreements with 16 companies. The plans for such a deal became clear in the immediate aftermath of the request by the company for protection.
Particularly, Hyflux filed a case with the court to bless it with protection as it looks for strategic partners. During the same period, Hyflux requested the Singapore Exchange Limited (SGX) to halt the trading of its shares. The Hyflux shares stayed in the red for the better part of that period.
Therefore, the coming of the white knight (SM Investments) is a welcome reprieve for Hyflux. As part of the debt restructuring pact signed in early May, Hyflux had agreed to divest Tuaspring. This is a desalination plant that also doubles up as a power plant. Particularly, this is also Hyflux’s largest asset.
However, with the new deal, it is likely that the asset will not go on sale. In May, the agreement was that Hyflux divests Tuaspring to pay creditors with the proceeds. The new capital injection by the two new investors will avail funds to clear with the creditors.
Interestingly, even without the deal, Hyflux was still unable to find a buyer for the Tuaspring. The company was valuing the asset at S$1 billion. On Monday, the company asked for an extended grace period so that it could find a buyer for the asset.
The deal is a godsend for Hyflux. This is because the incoming investors have a track record for turning around businesses. Also, they run diverse businesses in the Southeast Asia region and they are quite successful.
The white knights
Further, the two companies have great experience in the field of water and power utilities. For instance, Medco Group has interests in power generation and distribution. It also controls oil and gas properties strewn across the Southeast Asia region.
Speaking during the deal signing ceremony, Arifin Panigoro, Medco Group founder expressed his confidence Ms Lum’s leadership. He said: “Our aim is to further grow Hyflux, leveraging on its strength in system integration and optimization of water treatment and waste management as well as in power generation.”
On the other hand, Salim Group has great experience in running diverse businesses across the region. Anthony Salim, founder and chairman of Salim Group promised his unwavering support for Hyflux CEO. On his part, the consortium’s CEO, Arief Sidarto revealed that SM Investments desires to keep Hyflux intact.
Interestingly, the incoming of the investors mark the end to an incredible story that played in and out of court. Hyflux fought so vehemently to stick to its business even when the company was almost running aground.
This is a company that counted Temasek, a Singapore sovereign fund as one of the major shareholders. For the three months leading to March 31st, Hyflux posted a loss of S$22.21 million. Further, cash flow from operating activities for the first quarter of 2018 dipped to negative S$51.18 million.
At the same time, Tuaspring added downward pressure on Hyflux. Interestingly, much of Hyflux’s negative figures result from Tuaspring’s poor run. Without the figures from the desalination plant, Hyflux reported a net profit of S$1.04 million in Q1, 2018.
If the deal will finalize, investors can expect to begin trading Hyflux’s shares on SGX. However, it is unknown whether the trading will resume immediately. With SM Investments owning 60% of the company’s stock, it is impossible to tell the effect of the new structure. However, investors can take comfort in the comments of the stakeholders during the deal signing ceremony. They all said they intend to keep the company intact.
The company’s board will also have a hard time convincing the shareholders about the new structure. Given the depths Hyflux had sunk, it is unknown what direction their decisions will go.