KUALA LUMPUR: Former Permodalan Nasional Bhd president and group chief executive Jalil Rasheed has raised concerns over UEM Group Bhd's plans to take over and merge Eco World Development Group Bhd with its 66.06 per cent-owned UEM Sunrise Bhd.
In a series of tweet yesterday, Jalil suggested that UEM Group should not rescue a subsidiary in financial trouble by merging it with a company with cashflow problem.
"You create this giant (UEM Sunrise) that you then feel compelled to rescue when in financial trouble. Why put yourself through this? When easier solution is to make UEM (Sunrise) more efficient.
"I fear this deal would go down this route, because focus has always been on market capitalisation size, rather than efficiency metrics," he said.
Jalil queried whether the deal would be good for UEM Sunrise's shareholders.
"One thing I have noticed in Malaysia is the need to have institutional backer for companies, so discussion with banks are easier."
He said "biggest company did not mean better", while acknowledging there were many large ones that were inefficient.
"One must ask why Eco World wants to merge (and lose ownership control) unless they are not doing well? There are severe cashflow problems, add that to weak demand for properties," he said.
Eco World's net profit reportedly fell 72.7 per cent to RM13.8 million in the third quarter (Q3) ended July 301 2020 from RM50.5 million a year ago.
It reported lower revenue of RM477.9 million in Q3 from RM521.4 million previous year.
This was due to the lower share of the results of its Malaysian joint-ventures namely Eco Grandeur, Eco Business Park V, Eco Horizon, Eco Ardence and Bukit Bintang City Centre.
According to a recent report by CGS-CIMB Research, Eco World's net gearing stood at 0.75 times as at financial year 2019.
The firm expected Eco World's net gearing to increase to 0.8 times for FY20, and further grow to 0.9 times for FY21 and 0.93 times for FY22.
UEM Sunrise, meanwhile, posted a net loss of RM93.36 million in the second quarter ended June 30, 2020 from a net profit of RM40.36 million a year ago.
Its revenue plunged 88.8 per cent to RM111.96 million from RM1 billion.
Jalil said such merger happened before with another institutional investor, adding that it was "foolish to do it again with another."
"Same playbook, but lesson never learnt," he tweeted.
UEM Group, in a letter to UEM Sunrise and Eco World on Monday, said it would issue new shares in UEM Sunrise at 44.3 sen each to shareholders of Eco World in exchange for all the latter's shares at 46.9 sen each.
Khazanah Nasional Bhd fully owns UEM Group, which has 2.99 billion shares in UEM Sunrise for the 66.06 per cent stake.
At time of writing, Khazanah could not be reached for comment.