27/11/06 KUALA LUMPUR, Malaysia (AP) -- Three Malaysian government-linked palm oil companies will merge to create the world's biggest palm oil business worth around 31.4 billion ringgit (US$8.66 billion; euro6.62 billion), officials said Monday.
 
The merger, which the government hopes will cut costs and streamline the industry, would also potentially create the world's largest biofuels producer.

In a complex deal pushed forward by the government, Golden Hope Plantations Bhd., Sime Darby Bhd. and Kumpulan Guthrie Bhd. will combine to form a new company called Synergy Drive Sdn. Bhd.

Synergy Drive will acquire the assets of the three companies -- currently owned by government fund manager Permodalan Nasional Bhd., or PNB -- as well as assets of five of their six units, said CIMB Investment Bank, acting on behalf of the new entity.

"We believe that there are significant synergies to be achieved from the merger," said Nazir Razak, chief executive of CIMB Bhd., the parent of CIMB Investment. "There will be cost and revenue synergies from the merger."

Some analysts were cautious of the deal, dubbed the largest merger in Malaysia's corporate history. AmResearch in a recent report said the integration process would be tough given high operating costs in Golden Hope and Kumpulan Guthrie.

"We wonder if size really matters and if the merger of the plantation operations of the three companies would create economies of scale or not," AmResearch said.

Nazir said a 1 percent reduction in cost could result in a 10 percent increase in profit before tax.

"The challenge is to realize this cost reduction," he added.

The three companies have a total 525,872 hectares (1,299,430 acres) of land in Malaysia and Indonesia planted with oil palm, producing more than 2.1 million tons (1.91 million metric tons) of crude palm oil annually -- equivalent to 13 percent of Malaysia's total output.

CIMB said Synergy Drive could eventually account for as much as 6 percent of global production with a potential annual revenue of 26 billion ringgit (US$7.17 billion; euro5.48 billion) and employ 107,000 people.

Malaysia is the world's top producer of palm oil, currently being developed as a top-tier replacement for fossil fuels. Palm and soybean oil are the world's most consumed edible oils.

In addition to reducing overlap between the businesses, the government hopes the deal will push Malaysia's palm oil producers to develop its biofuels industry, which has attracted attention as countries try to reduce their dependence on fossil fuels.

Biofuels development could require companies to revamp plants or build new ones for expanded production, and a merger is likely to save on those costs.

PNB and funds it manages currently own 39.4 percent of Sime, which is also heavily involved in motor vehicle and heavy equipment distribution, property development and energy industry. PNB also owns 64.7 percent of Guthrie, and 51.8 percent of Golden Hope.

Shareholders haven't approved the proposal yet, CIMB said.

Under the plan, PNB will own around 45 percent of Synergy Drive after its listing, CIMB said.

Shares of Synergy Drive will be listed on the local stock exchange once the deal is completed, the bank said. Synergy Drive's share value estimate was placed at 5.25 ringgit (US$1.44; euro1.10) by CIMB.

Combined, Synergy Drive will have a potential market capitalization of 31 billion ringgit (US$8.6 billion; euro6.58 billion), making it the fifth-biggest listed company in Malaysia and larger than IOI Corp., Malaysia's top plantation company with a market value of 23.5 billion ringgit (US$6.48 billion; euro4.95 billion).