27/11/06, Kuala Lumpur: A merger of three Malaysian plantation conglomerates will create the world's largest listed palm oil estate, and boost the country's status as a palm oil producer amid growing regional competition, analysts said.

The Government-linked companies, Golden Hope Plantations, Sime Darby and Kumpulan Guthrie and six of their listed units, last week suspended trade in their shares ahead of what they said was a "major corporate exercise."

The merger, expected to be announced Monday (today), will mark Malaysia's biggest such undertaking ever.

The Government has thrown its support behind the planned merger, with deputy prime minister Najib Razak saying it will create a "formidable group" on the back of strengthening global demand for palm oil.

Analysts said the move underlines the expansion of Malaysia's agriculture sector as it attempts to carve a niche for itself in the face of growing competition from India and China.

"The competition from China and India is much fiercer in the manufacturing sector. The government realises that it has to transform its economic model by moving the agricultural sector higher up the value chain," an analyst from brokerage Hwang DBS-Vickers said.

Malaysia is also in the midst of rehabilitating its Government-linked companies (GLCs) to improve their efficiency and competitiveness - moves analysts said could help to stave off competition from neighbouring Indonesia.

While Malaysia is the world's biggest palm oil producer, Indonesia is expected to claim the top spot status by 2007 due to an aggressive expansion of its plantation sector.

Malaysia's crude palm oil (CPO) production in 2005 reached 14.96 million tonnes, which raked in some 28.6 billion ringgit (7.7 billion dollars) in export earnings for the industry, the Malaysian Palm Oil Board said.

Indonesia's national CPO output was at 12.5 million tonnes, according to data from the country's Department of Agriculture.

"The Government is really serious in its GLC transformation," said another analyst with a local brokerage.

"The current administration has resolved to raise the standards of GLCs to make them world-class companies. This may be one such move," he said.

"I think it can be done if they have the right management and efficiency."

Once merged, the new entity will have a combined market capitalisation of 7.23 billion dollars (RM26 billion), employ about 93,000 people, and will be the country's fifth-largest company on the stock exchange.

With total plantation land amounting to about 600,000 hectares, it will also control about six percent of the global crude palm oil supply.

"The size will really matter ... In terms of the merged entity, it will (be) double the size of what IOI has," said the Hwang DBS-Vickers analyst, who declined to be named.

Listed IOI Corp, which is not state-controlled, is seen as the country's most efficiently-run plantation company and has proved a magnet for foreign investors.

"Theoretically its market capitalisation will be bigger than IOI, and foreign investors like stocks that are big," said the analyst.

"In terms of bargaining power and lowering costs by pooling resources, there could be a lot of synergies with all the merged entities if they fully integrate," he added.

But if the merger creates a mega palm oil producer, analysts said its success will be measured by how well it is managed, and whether it competes with rival, more efficient palm oil producers in the country.

The three companies will have to reconcile different production costs and efficiencies, contemplate job layoffs and settle the logistics of managing scattered plantations in Malaysia and Indonesia, they said.

The merger is "mixing the good and the not so good," linking three companies with "very different operation efficiencies," said the director of AmResearch, Gan Kim Khoon.

And despite the size of the new company, it will not be large enough to have a major impact on the global market for crude palm oil (CPO).

"It's big, but not big enough to corner the world's CPO market," said Yin Shao Yang, an analyst at KN Kenanga Research.

Malaysia's palm oil production accounts for about half of global output and are on track to hit a new record this year with CPO production forecast to reach 15.1 million tonnes amid strong demand from the global food, biodiesel and oleochemicals industries.