KNM’s Lee May Lead Buyout If Banks Can Raise Funds

By Angus Whitley

March 16 (Bloomberg) -- KNM Group Bhd. 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 percent of KNM, and suggested he buy the remaining shares, though none has made a proposal that includes financing, he said. KNM has lost 71 percent in the past six months in Kuala Lumpur trading, cutting its market value to 1.31 billion ringgit ($354 million).

“We are very undervalued,” Lee, who set up Selangor-based KNM in 1990, said in an interview on March 13. “The opportunity for privatization 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 selloff by foreign investors combined to make KNM the second-worst performer on Malaysia’s benchmark index in 2008. He said he probably needs between 1 billion and 2 billion ringgit to pay for any takeover.

Private investment funds, which would take a stake in KNM in return for cash for the buyout, may be more likely to finance the transaction than banks, said Kaladher Govindan, head of research at TA Securities Holdings Bhd. in Kuala Lumpur.

“The main issue is who’s going to give him the funding,” said Govindan, who has a “buy” rating on KNM. “A buyout is possible, but not at this price. They still have substantial foreign shareholders, and if there’s more selling in Europe, you may see more redemptions and KNM could be affected.”

Servicing Debt

KNM was unchanged at 33 sen at the 12:30 p.m. local time break. The shares reached a record 2.48 ringgit in January 2008. At the current price, Lee said he’ll continue to buy back shares.

Cashflow at KNM 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 25 billion ringgit in guaranteed funds to help businesses obtain credit and raise money on the bond market in the Southeast Asian nation. 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.

Volatile Prices

The Malaysian company, with an order book of 3.9 billion ringgit, won about 300 million ringgit of work between December and January, Lee said. The revised value of all the contracts that KNM is seeking is 18 billion ringgit, 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 colors.”

Crude oil for April delivery fell as much as 5.2 percent to $43.85 a barrel in after-hours electronic trading on the New York Mercantile Exchange after the Organization of Petroleum Exporting Countries decided against deeper output cuts. Crude, which has slumped 70 percent from its July record, was at $44.59 at 12:40 p.m. in Kuala Lumpur.

Lee said he expects oil and gas producers to proceed with more exploration projects if oil rises beyond $50 a barrel, or stabilizes at a level between $45 and $50.

To contact the reporter on this story: Angus Whitley in Kuala Lumpur at awhitley1@bloomberg.net