28/11/06 (The Star)  -  PETALING JAYA: The three-year-old plan to merge Sime Darby Bhd, Golden Hope Plantations Bhd (GHope) and Kumpulan Guthrie Bhd (Guthrie) under the stable of Permodalan Nasional Bhd (PNB) has finally been set into motion.

The original plan was for Sime Darby, the group with the strongest track record among the three, to be the vehicle to spearhead the merger to create a world-class palm oil plantation conglomerate with a strong global presence.

However, the plan was shelved when crude palm oil (CPO) prices declined and uncertainty plagued the global supply and demand for the commodity at that time.

But it is a different story for 2006 as the plantation sector is seeing the CPO price surge to above RM1,900 per tonne – the highest level in more than 2½ years. This is also supported by significant changes in the demand structure for palm oil, which is now sought after not just for food, but also for palm biodiesel.

The improved outlook has spurred optimism that there will be more upside for both upstream and downstream activities in the palm oil sector.

Industry observers and plantation players concur that the encouraging developments in the palm oil sector going forward have somewhat helped put the proposed merger on the fast track.

However, the interesting but unexpected twist this time around is that the proposed merger would be driven by a special purpose vehicle, Synergy Drive Sdn Bhd, which will be seed-funded by prominent financial group CIMB Investment Bank Bhd (CIMB) to create the world’s largest listed oil palm plantation conglomerate.

StarBiz has been made to understand that the targeted PNB companies under the merger plan would be holding urgent board meetings this week to discuss CIMB’s proposal. All three companies would have to decide by the Dec 27 deadline.

GHope is believed to be planning to hold its board meeting on Thursday.

Timing had also been an important factor for the proposed plantation merger, especially with the CPO price now at a high and the market capitalisation of most plantation companies having gone up tremendously.

Beneath the pretty picture, however, are underlying risks associated with the formation of the plantation conglomerate with a substantial land bank of about 600,000ha in Malaysia and Indonesia.

In the plantation sector, having a large acreage is not a reflection of a company’s efficiency and competitiveness.

An industry consultant said Sime Darby, GHope and Guthrie’s CPO and palm kernel yield per hectare were well below the average CPO yield of five tonnes per hectare or more achieved by top plantation players like IOI Corp Bhd, Kuala Lumpur Kepong Bhd and United Plantations Bhd.

Over the past three years, the return on equity of the three companies had been in the single digit unlike their peers’ double-digit returns.

Furthermore, controlling a land bank of 600,000ha is definitely no easy feat. It would perhaps be more logical for Synergy Drive to focus purely on CPO production and downstream activities like refining, oleochemicals and biodiesel and list its other core businesses under separate units. 

Golden Hope Plantations group chief executive Datuk Sabri Ahmad told StarBiz: “With globalisation, size is important to compete with giants like Cargill Bunge and ADM.”

“Our recent exercise with AEB estates proves that benefiting through synergy and cost reduction is possible with CPO prices heading towards RM2,000 per tonne,” he added.

The future for the palm oil industry is bright going forward, Sabri said. At the end of the day, it is all about “creating value and generating better return”, to quote PNB group chief executive Tan Sri Hamad Kama Piah Che Othman.