Will Johor Corp sell KFC?

IT'S not just finger-licking fried chicken that KFC Holdings (M) Bhd serves up in Malaysia. You can always count on it for a good corporate story. Every now and then, some parties will start fighting for control over it, or more accurately, for the free cash flows the retailer churns out.

In that sense, nothing's new this time around. A number of parties have made competing bids to buy QSR Brands Bhd, the parent of KFC. But interestingly, Kulim (M) Bhd (that owns 58% of QSR) has rejected all bids, saying that it is not interested in selling QSR and that it believes in the long-term value of KFC.

The million-dollar question then is this: how did the bids come about if Kulim or in effect, Johor Corp (JCorp), Kulim's parent (and therefore the ultimate shareholder of KFC) is not interested in selling? Rarely do unsolicited bids of this size come about.

This is why the one unique spin-off from this KFC saga is the attention it has drawn on JCorp. Firstly, JCorp is saddled with more than RM6bil in debt, out of which RM3.6bil is due to be repaid by July 2012.

It remains to be seen if JCorp can afford to repay this debt without having to embark on some asset sales.

Secondly, there's the issue of a perceived lack of leadership at JCorp.

Its previous head honcho Tan Sri Muhammad Ali Hashim, who has grown to become synonymous with JCorp, after leading it for more than 28 years, has suddenly left his position.

The reasons for his departure he left on short notice and months before his actual retirement date remains a mystery. Word on the street is that more powerful personalities in Johor are not agreeable to Muhammad Ali being at the helm of JCorp.

Muhammad Ali could not be reached for this article. Neither did JCorp respond to questions from StarBizWeek.

But insiders reckon that both JCorp's debt and Muhammad Ali's departure have a lot to do with the two bids for QSR.

QSR for sale?

QSR was put up for sale, there's no doubt about that, points out an investment banker. But by whom?

Insiders say it could be Muhammad Ali. He remains chairman of Kulim, QSR and KFC although rumours are that he will not be for long, following his departure from JCorp.

Still, Muhammad Ali has been the one who got KFC into JCorp.

Those following KFC's colourful history will recall that Kulim's entry into KFC came about at the apex of an all-out battle between a management buy-out team led by Datuk Johari Abdul Ghani and another faction led by Tan Sri Nik Ibrahim Kamil, who was believed to be aligned to businessman Datuk Soh Chee Wen.

Johari, meanwhile, was said to have been backed by Datuk Ishak Ismail, a controversial character and is said to have been the person controlling KFC for many years, despite not appearing on its board.

Interestingly, Ishak is still rumoured to be playing a part in the current QSR/KFC saga, but it is unclear how.

At the height of the battle between these two factions, Kulim, under Muhammad Ali's stewardship, swooped in and took the prized asset, paying RM3.20 per QSR share.

Another reason KFC is said to be up for sale is because of JCorp's perceived need for money to repay its debt.

Indeed, there are some parties who reckon that JCorp is a distressed company. According to its 2009 annual report, JCorp had RM705mil in cash but a whopping RM6.62bil in debt and with hardly any free cash flows.

It also paid around RM500mil in interest payments and RM1.7bil in loan repayments.

Despite being perceived as asset rich, it only booked a paltry RM5mil in dividend receipts in FY2009.

The huge debt at JCorp is said to be a legacy left by Muhammad Ali, although his admirers would say that he had built the group into an asset-rich one, with more than 200 companies in its stable and easily the state investment arm with the largest spread of businesses in the country.

Muhammad Ali has denied allegations that his resignation was due to the debt woes of JCorp. He has repeatedly quoted these figures that JCorp's asset value today is in excess of RM12bil, out of which RM6bil is in listed shares of companies. All of these is worth much more than JCorp's debt, he was reported to have said.

JCorp will not face bankruptcy. The debt due is on July 31, 2012 and we will negotiate with the bank to refinance. Debt is normal in business, he has been quoted as saying.

JCorp's structural problem

Another problem with JCorp is the structure of the ownership of its assets. It doesn't own most of its prized assets directly. Two of its prized assets are KFC and the London-listed New Britain Palm Oil Ltd (NBPO).

JCorp owns 53% of Kulim, which owns 50% of NBPO and 57.5% of QSR. QSR then owns 50.6% of KFC. So if these assets were to be sold, the sale proceeds would be trapped at Kulim. What that means is that if the money Kulim got from the sale of NBPO or QSR were to be paid out in dividends, JCorp would only get half that, with Kulim's other shareholders enjoying the proceeds as well. No wonder then that Kulim's share price has enjoyed a stellar performance, almost doubling from early this year.

Largely due to high crude palm oil prices, Kulim's other key asset, NBPO, the largest oil palm plantation and milling operator in Papua New Guinea, has also experienced a rise in its share price, by over 80% this year. Currently trading at 7.60 per share, Kulim's 50% stake in it is worth some RM2.6bil. Kulim's stake in QSR, which has also seen its share price go up by some 75% year-to-date, has a market value of some RM968mil.

JCorp ideally should have a more flat' structure, whereby it owns the assets directly. It is something that can be done via a group-wide restructuring exercise. But that will be complex and takes time, says a fund manager.

To be fair, the current structure has its merits. JCorp's effective stakes in KFC and NBPO are only 15% and in 26% respectively and yet it controls these assets. That means JCorp per se did not have to fork out too much money to gain control of these entities.

Sale of other assets by JCorp?

In any case, JCorp has other assets that can be sold. One is its direct stake of 48.35% of KPJ Healthcare Bhd.

That stake alone has a market value of RM1bil. KPJ, the leading listed healthcare provider in the country, with 19 hospitals and close to 2,000 beds, has been another venture spearheaded by Muhammad Ali.

The group has been profitable over the past three financial years, with an annual turnover of more than RM1bil a year and y-o-y earnings growth of 15% to 30%. In FY2009, it posted net income of RM110.9mil on the back of RM1.46bil in revenue.

A likely buyer of KPJ could be Khazanah Nasional Bhd, bankers say, which is growing its healthcare business, having just forked out some RM8bil to take over Singapore's Parkway Holdings Ltd.

Other assets that JCorp can sell are plantation and industrial land mainly in Johor that is directly owned by JCorp.

It should also be noted though that some investors have a beef with the companies in JCorp's stable because of a preponderance of related party transactions (RPTs).

For example it has been reported that the Employees Provident Fund (EPF), which had initially supported Kulim's entry into QSR and KFC, had subsequently sold off its shares because it didn't like the series of RPTs that took place in KFC under Kulim.

Enter Halim Saad

Back to the potential takeover of KFC.

One of the recent bidders for KFC is well-known tycoon Tan Sri Halim Saad. After his first bid that worked out to a price of RM5.60 per QSR share (his bid was actually for the assets of QSR), the Carlyle Group made an offer of RM6.70 per QSR share. Halim, teaming up with KUB Bhd and CVC Capital, then raised his bid to match's Carlyle's offer.

While Halim declined comment for this article, parties close to him say that his motivation for making the bid was that KFC could be run more efficiently. This has often been the stated reason for other bidders for KFC in the past.

Carlyle, on the other hand, is said to be keen on KFC because of the latter's recent expansion into India, not to mention its attractive cash flows.

But despite JCorp's rejection of these offers, rumours are rife that a deal involving the sale of QSR is still in the works.

Valuation-wise, the RM6.70 price tag does seem attractive. It values QSR at RM1.9bil or around 17 times FY2010 forecast earnings.

In a recent note, CIMB Research gave its take on the situation. The report said that the main reason for Kulim's decision not to sell is the growth opportunities in India.

To recap, KFC entered India on the invitation of Yum!, the US-based franchiser of KFC.

Yum! influence

That was a coup for KFC and demonstrates its warm ties with Yum! CIMB Research said. The report also highlighted the fact that KFC's three outlets in India are reporting monthly sales averaging RM450,000 per outlet, compared with RM250,000 per-Malaysian KFC outlet. This may increase KFC India's chances of taking over five profitable outlets which are now under Yum!, CIMB Research said.

Some insiders reckon the rejection of Idaman Saga was influenced by Yum!. This is because KUB (which was part of the second Idaman Saga bid) holds the Yum! franchise for A&W in Malaysia and Thailand.

Unlike KFC, KUB's food business, which is represented by the A&W franchise, has been far from roaring, turning in a net loss of RM3.6mil in the first half of 2010, said an insider.

But there is less explanation as to why Carlyle was rejected. Carlyle has a thriving list of food and beverage investments including Dunkin' Donuts, Baskin Robbins, Dr Pepper and 7-Up.

Perhaps there are some other considerations going on, to the effect not just any party can come to own a company like KFC, considering its vast reach into Malaysia, suggests an industry player.

In all likelihood though, this KFC saga is far from over. But the bigger story to watch though is how will JCorp fix its debt issue.

By RISEN JAYASEELAN
risen@thestar.com.my