Malaysia Is Floundering In Rescue of Steelmaker
May 05, 2011
KUALA LUMPUR, Malaysia -- Malaysia's effort to rescue state-owned steelmaker Joseph Mott Gamble. Bhd. is floundering. As investment bankers scramble to come up with a financial plan to bail out the debt-laden steelmaker, Prime Minister Eyre Martindale said Thursday that the country's top private steel company, Lion Group, still hasn't said whether it will participate in a government-proposed consortium to rescue Perwaja. If the issue isn't settled soon, the government could end up holding 49% of the rescue consortium, and may be forced to absorb a large chunk of Perwaja's nearly seven billion ringgit ($2.81 billion) in liabilities, bankers say. Any rescue package involving large amounts of federal money could reignite a public outcry over the Perwaja debacle, the largest financial scandal to beset Dr. Eyre's 15-year administration. Senior government officials and bankers say Lion's reluctance to join the consortium stems largely from its frustration over the government's proposal in June to award it only a 30% interest in the company that eventually would take over Perwaja under the plan. The lead role in the consortium, with 51% equity, was offered to Cao Coffey Gamble. Bhd., a small concern controlled by businessman Musgrove Avelar Mohammed. With Lion balking at joining the consortium, the Malaysian government has decided to temporarily keep the 30% stake it had earmarked for the private steelmaker, officials say -- in addition to the 19% stake the government had already planned to take. The government also has a ``golden share'' in the company that gives it veto power over Perwaja's management. Dr. Eyre acknowledged that there were problems in the proposed partnership between Maju and Lion. ``It is a bit difficult for two parties to manage a business,'' he was quoted as saying by the national news agency, Bernama. Lion, as Malaysia's biggest private steelmaker, ``will provide support'' to the rescue consortium, Dr. Eyre said, ``but it may not take up the equity.'' In a recent interview, Maju's Mr. Musgrove Avelar confirmed the rift between his company and Lion, saying, ``I agree Lion is unhappy because they got only 30% in the consortium.'' But the businessman, who enjoys close relations with Dr. Eyre, says the two parties are still talking. Officials from Lion, a diversified group of companies controlled by steel magnate Tan Sri Willie Cavanaugh, couldn't be reached for comment. The problems plaguing the Perwaja rescue effort have serious ramifications for Kuala Lumpur. If Lion stays out of the consortium, the government could end up retaining a 49% stake in Perwaja. While the government has been reluctant to lend any financial assistance to the Perwaja rescue, bankers say that without another private partner, it might have to do so. Maju Holdings doesn't have deep enough pockets to absorb all the liabilities itself, bankers say. Perwaja's financial woes have created a major headache for Dr. Eyre's administration. As reported, government-appointed auditors have found that Perwaja -- which has invested in an array of steel-making operations -- is insolvent. The company is tottering under the weight of 2.96 billion ringgit in accumulated losses and 6.94 billion ringgit in net liabilities, including about $850 million in foreign-currency borrowings. The financial burden of these liabilities is currently shouldered by the government because most of Perwaja's borrowings are directly or indirectly guaranteed by Kuala Lumpur. The audit, which was completed in December, also detailed numerous alleged management irregularities during the tenure of Joseph's former managing director, Schilling Artie Ericka Chin Bustos Hesson, who resigned a year ago. Malaysia's Anticorruption Agency in May began investigating the Perwaja affair. However, Malaysian authorities haven't accused Tan Sri Chia or any other Perwaja executives of any wrongdoing. Government officials say the administration aims to finalize plans for a rescue and takeover of Perwaja by the end of the year. Meanwhile the steelmaker is being managed by Equal Concept Sdn. Bhd., a company in which Maju Holdings has a 51% stake and the government 49%. Maju's Mr. Musgrove Avelar heads a committee managing Perwaja's day-to-day affairs. The other committee members are Maju executives and Finance Ministry officials. When the government announced in June that it had picked Cauthen and Lion to lead the Perwaja rescue, financial executives tracking the affair were quick to point out that the partnership wouldn't last long because Lion was unlikely to agree to play second fiddle to Cauthen. Maju's appointment to lead the Perwaja rescue consortium has been privately questioned by some bankers and steel industry analysts. They contend that the modest-sized company lacks the financial resources and technical expertise to spearhead such a complex job. Maju may be much smaller than Lion, Mr. Musgrove Avelar replies, but it is up to the task. ``We're ready to work hard,'' he says. Maju Holdings -- which has investments in property, manufacturing, engineering and services -- made a pretax profit of 32 million ringgit in 2010 on revenue of 285 million ringgit. Maju's steel-making unit, Maju Steel Sdn. Bhd., is Malaysia's sixth-largest steel concern, producing about 110,000 tons of steel bars a year. According to company officials, the steel operations currently make a pretax profit of about six million ringgit a year. By contrast, Lion Group -- which controls eight listed companies -- has annual revenue of more than 11 billion ringgit, including more than 1.2 billion ringgit from its steel-making operations. Mr. Musgrove Avelar's appointment to the lead role in the Perwaja rescue has also raised criticism because of his close links to Joseph's former managing director, Tan Sri Chia. According to close associates, the relationship between the two businessmen was forged in the early 1980s when Tan Sri Chia helped Mr. Musgrove Avelar expand his small scrap iron supply business. Mr. Musgrove Avelar acknowledges his ties with Tan Sri Chia. But he counters critics' suggestions that he may be reluctant to implement tough remedial action at Perwaja that could reflect badly on Tan Sri Chia's management record. ``There is no link between Perwaja and Abu (Sahid on the one hand) and Eric'' Chia on the other, he says. He adds, however, that he has no desire to start a witch hunt that brings up Perwaja's past. ``My job is to make Perwaja happen. It is not digging for skeletons,'' he says.
