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The Employees Provident Fund (EPF) has made a conditional takeover offer to buy all the shares in Malaysian Resources Corp Bhd (MRCB) for RM1.50 each after triggering the takeover threshold.

The exercise could see EPF pay up to RM1.36bil for MRCB if there was full acceptance from other shareholders.

The conditional offer was prompted after EPF was allocated additional shares under MRCB’s RM566mil rights issue that led to the fund’s shareholding in the developer exceed 33% to 33.78%

The increase in EPF’s shareholding past the 33% threshold obliged the fund to conduct the takeover under the Malaysian Code on Take-Overs and Mergers, 1998.

In a statement to Bursa Malaysia yesterday, MRCB said EPF, however, intended to maintain the listed status of MRCB and would not privatise the company.

OSK Research head Chris Eng said the offer of RM1.50 a share was slightly below the brokerage’s fair value and that the offer itself was not very attractive.

“There is a lot more potential in the company which we have not factored into the fair value of the stock,’’ he said.

MRCB is talked about being a bidder for major tracks of land in the Klang Valley and the money it raised from the rights issue would go towards buying land for future development projects.

Analysts said its track record in developing KL Sentral would act as a good platform for MRCB in making its case in any bids for such land.

Sources said EPF was unable to apply for a waiver from making the takeover from the Securities Commission as it did not fulfil an important criterion, which is the condition of not trading a company’s shares in the past six months.

Under the Code, EPF would have to offer to shareholders of MRCB the highest price it paid to buy an MRCB share over the past six months, sources said.

The offer for MRCB represents a small 2% premium over the last traded price of the stock of RM1.47. Sources said EPF wanted to make a fair offer but did not intend to give large premiums of around 20% seen in other privatisation deals as it was not the fund’s intention to delist the company from the stock exchange.

“It does not want to take the company private and would like to see future capital appreciation of MRCB,’’ the source said.

Sources also shot down suggestions that the takeover offer was a new strategic direction for the fund where it would prefer direct control of companies.

Although EPF controls RHB Capital Bhd and Malaysian Building Society Bhd, it does not want to take MRCB down the same path.

Sources said even if EPF, which also owns large stakes in other developers such as IJM Corp Bhd, dramatically increases its stake in MRCB, it would not make MRCB its vehicle for property ventures.

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Employees Provident Fund (EPF) contributors may have to be contented with lower returns in the coming years as the country’s biggest pension fund struggles to boost income amid steep falls in interest rates and a weak equity market.

Analysts said given the pension fund’s size and strict mandate, it would be very difficult to sustain payouts of above 5% in the coming years.

The 4.5% dividend declared for 2008 on Monday was generally well received, despite coming in lower than the 5.8% in 2007.

That the EPF was able to fork out steady dividends of above 5% between 2004 and 2007 was mainly due to gains from investments in equities.

The collapse in global equities last year, however, had eroded the value of EPF’s shareholdings, forcing it to make a provision of RM4.69bil to account for the lower value of its shares, both domestically and abroad.

The KL Composite Index fell 40% in 2008 and was down 3.3% so far this year at yesterday’s closing of 847.96 points.

Also, the economic slowdown has dragged down corporate profits. This, in turn, has impaired their ability to pay out dividends to shareholders, further reducing the return on investments for EPF.

The EPF has stakes in more than 100 companies listed on Bursa Malaysia, as well as smaller stakes in a number of big listed firms overseas.

Income from equities accounted for 35%, or RM6.67bil, of EPF’s total gross investment income last year.

Just how bad EPF’s dividend payouts will be affected by the current market situation remains to be seen.

It is worth noting that under the law, EPF has to maintain a dividend rate of at least 2.5% annually. The dividend must come from income generated from its investments.

There were calls for a review from various parties demanding a higher payout, but some quarters said the pension fund had done well in safeguarding the nation’s retirement savings amid the current economic crisis.

The question now is how will EPF fare in 2009 and beyond?

Already the fund has warned that this year’s payout would be less than that for 2008.

Weak equity markets will continue to hurt EPF in the near term, but in the longer term, the fund’s performance will also be determined by the returns it gets from investing in low-risk assets such as government bonds.

The EPF had allocated a quarter of its RM342bil investment funds for higher yielding government papers. But as these higher yielding notes expire, the fund must purchase new issues which will now come with lower returns.

Malaysian Government Securities (MGS) debt papers maturing in three and five years are currently yielding less than 4% at today’s prices.

In comparison, MGS five-year notes yielded more than 5% a decade ago and above 7% during the 1997/98 Asian financial crisis.

Another big chunk of EPF holdings is in highly rated corporate bonds and low-risk guaranteed loans.

However, the global economic turmoil has cut the supply of new bonds coming into the market.

Cheaper lending rates had also reduced interest income from loans given out.

Investment in bonds and loans made up 40% of EPF’s total investments as at the end of last year.

Dwindling yields from these asset classes have been a drag on EPF’s income for the past couple of years. – The Star

Related Posts:

• EPF told to reduce stake in RHBCap
• PLUS Minority Shareholders approved UEM-EPF takeover
• Likely “YES” for PLUS sale to UEM-EPF
• PLUS calling EGM on UEM Group and EPF takeover offer
• EPF reducing stake in RHB Cap