Wednesday, March 18, 2009

KNM's Lee May Lead Buyout If Banks Can Provide Funding

KNM Group Bhd (7164) managing director Lee Swee Eng said he will consider leading a management buyout of the Malaysian oil and gas services provider as long as banks can raise the funds.Investment bankers have approached Lee, who owns 25 per cent of KNM, and suggested he buy the remaining shares, though none has made a proposal that includes financing, he said.

KNM has lost 71 per cent in the past six months in Kuala Lumpur trading, cutting its market value to RM1.31 billion. "We are very undervalued," Lee, who set up Selangor-based KNM in 1990, said in an interview on March 13. "The opportunity for privatisation is a good opportunity, but it's the source of funding.

There's no offer on the table. "Lee, 53, has seen the value of his stake plummet as the global recession, tumbling oil prices and a sell-off by foreign investors combined to make KNM the second-worst performer on Malaysia's benchmark index in 2008.

He said he probably needs between RM1 billion and RM2 billion to fund any takeover. KNM share prices closed around 34.0 sen. The shares reached a record RM2.48 in January 2008. Cashflow at the Selangor-based company would be sufficient to service any borrowings after a buyout and associated cost cuts, Lee said. Annual profit at KNM has climbed every year since 2004. "With our earnings, we should be able to handle that," he said.

"I don't think that would be an issue." Banks worldwide have restricted lending during the financial crisis, and Malaysia's government last week pledged RM25 billion in guaranteed funds to help businesses obtain credit and raise money on the bond market. Even so, Lee said it's not clear whether banks, foreign or domestic, would be willing to lend funds for a management buyout.

KNM's business prospects are tied to the price of crude oil because exploration projects, for which producers hire companies such as KNM, become less viable as prices fall. KNM has had to reduce its bids for most of the projects up for tender, Lee said. The company, with an order book of RM3.9 billion, won about RM300 million of orders between December and January, Lee said.

The revised value of all the contracts that KNM is seeking is RM18 billion, he said. "The business has been a bit slow because of the volatility of the price of oil," Lee said. "We're expecting the second quarter onwards to be better.

Most of the rebidding has taken place. We will sail through this with flying colours. "Crude oil for April delivery still hovers around USD 44.00 to USD 48.00 a barrel in after-hours electronic trading on the New York Mercantile Exchange after the Organisation of Petroleum Exporting Countries decided against deeper output cuts. Crude slumped 70 per cent from its July record. - Bloomberg

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