KUALA LUMPUR (May 24): KNM Group Bhd is selling its entire stake in Borsig GmbH, a German-based process equipment manufacturer, to GPR Siebzigste Verwaltungsgesellschaft mbH (GSV) for €220.8 million (RM1.03 billion), but is expected to make an estimated loss of RM490.55 million from the disposal.
In a bourse filing on Tuesday (May 24), the group said its wholly-owned indirect subsidiary Deutsche KNM GmbH entered into a conditional sale, purchase and transfer agreement with GSV on Monday.
KNM is a multinational group with core businesses in project management, engineering, manufacturing and construction for the renewable energy, power, utilities, refining and petrochemical industries.
GSV is a special investment vehicle wholly-owned by Vorsprung Industries SCSp, incorporated for the acquisition of Borsig.
The price tag represents an enterprise value (EV) over earnings before interest, taxes, depreciation and amortisation (ebitda) of 6.63 times, compared with peer EV/ebitda valuation of between 2.85 times and 7.73 times, with an average of 5.29 times, the filing said.
The proposed disposal of 15 shares, representing 100% equity interest, in Borsig to GSV may result in an estimated loss of approximately RM490.55 million to KNM, which includes a portion of goodwill of RM355.74 million impaired in December last year.
KNM, however, believes the transaction is a timely cash injection to improve the group's financial position. Upon receipt of the proceeds from this deal, KNM plans to repay its bank borrowings amounting to RM874.23 million, reducing total bank borrowings to RM391.53 million, from RM1.28 billion.
This will result in annual interest savings of RM85.02 million, KNM said.
KNM is also allocating RM71.98 million for working capital requirements for renewable energy projects of the group and another RM15.97 million for the estimated expenses on the proposed disposal that may be completed in the third quarter of 2022.
UOB Kay Hian Securities (M) Sdn Bhd has been appointed as the principal adviser for the proposed disposal.
Borsig sale not what KNM originally planned
KNM’s proposed sale of Borsig came as a surprise to the market, with the counter down 3.5 sen or 17.95% soon after it resumed trading.
The sale came despite the ongoing negotiations between KNM and its guarantor, the Asia Development Banks’ Credit Guarantee and Investment Facility (CGIF), for the payment of its 2.78 billion baht Thai bonds (RM352.57 million) which KNM defaulted on in November 2021.
Further, the €220.8 million (RM1.03 billion) sale is well below the price tag of €300 million (RM1.47 billion) sought by KNM’s previous board. Recall that KNM bought Borsig for €350 million or RM1.67 billion in 2008.
While KNM said the sale would also facilitate its business strategy of “growing its renewable energy business”, the absence of Borsig’s income contribution — it generates pre-tax profit of around RM100 million annually — would leave the group in a difficult position to turn around, an analyst said.
“Borsig was the cash cow that KNM needed to subsidise all the other bad apples,” the analyst said. “Now they sell the good apple but are hanging on to the bad ones.”
KNM’s has two renewable energy businesses, namely the loss-making, 72%-owned 200,000 litres-per-day bio-ethanol plant in Thailand currently being expanded, and a waste-to-energy (WTE) plant in the UK currently under construction, previously slated to have a capacity of 36MW.
As recently as December 2021, KNM was still considering to keep a stake in Borsig and list the company, and instead sell both the bio-ethanol plant and the WTE plant assets to settle the payments linked to the Thai bonds.
In its December filing, KNM said it is also seeking financing in Germany, and is proposing to inject subsidiaries into a special purpose acquisition company (SPAC) in exchange for cash and a stake in the SPAC by end-3Q22 — both to partly repay its borrowings.
In January this year, KNM also announced the proposed listing of its subsidiaries FBM Hudson Italiana SpA and FBM-KNM FZCO in the Singapore Stock Exchange’s Catalist Board.
KNM turned into the red in the financial year ended Dec 31, 2021 (FY21) with net loss of RM601.48 million or 18.3 sen per share from net profit of RM64.2 million or 2.39 sen per share a year ago, following impairment loss on its ethanol plant under construction, impairment of goodwill and additional costs from project delays.
FY21 revenue fell 22.77% to RM1.02 billion, from RM1.32 billion. The group has yet to release its results for 1QFY22.
At 3.48pm, KNM shares were down 3.5 sen or 17.95% at 16 sen, giving the group a market capitalisation of RM588.52 million.