RPT-UPDATE 2-Power project win for Malaysia's 1MDB bolsters IPO prospects

Fri Feb 28, 2014 3:56am EST

* 1MDB wins tender for $3.6 bln coal-fired power plant

* At least 6 banks invited to pitch for the IPO -sources

* 1MDB has faced criticism over lack of transparency

* It has also delayed financial accounts, changed auditors

By Yantoultra Ngui and Saeed Azhar

KUALA LUMPUR/SINGAPORE, Feb 28 (Reuters) - A planned $2 billion IPO of Malaysia Development Bhd's (1MDB) power assets got a major boost on Friday after the sovereign wealth fund won a closely contested government tender to build a power plant.

The news came as sources said that 1MDB, which is chaired by Prime Minister Najib Razak, had shortlisted at least six investment banks to make final presentations for the initial public offering - seen as the biggest in Southeast Asia this year.

Winning the auction for the $3.6 billion 2,000 megawatt coal-fired plant, known as track 3B, should help 1MDB alleviate concerns that its current portfolio of utilities is old and make the case that its power business should be considered a growth stock.

It also comes at a time when the fund has been dogged by negative publicity over massive fees paid for bond sales, delays in publishing its financial accounts, a transfer of funds to the Cayman Islands and most recently, changing auditors.

"Definitely winning the project 3B will allow them to increase their net present value, and enterprise value will go up, allowing them to have better valuations," said Jeremy Goh, an analyst at Kuala Lumpur-based Alliance Research.

"Their power plants are old power plants...and these old power plants are not exciting especially when you're going for an IPO."

CLOSE CALL

A decision on the winning bidder had been delayed after bids from 1MDB and YTL Power International came in too close to call. State firm Tenaga Nasional and Malakoff Corp Bhd - a unit of MMC Corp had also been in the running.

In its IPO, 1MDB is expected to bundle 15 power plants it bought over a two-year shopping spree in a bid to a capitalise on growing electricity demand in Malaysia, the Middle East and South Asia, financial sources say.

But a Reuters examination of 1MDB's energy assets showed that many of its power plants are either near the end or more than halfway through their concessions.

In contrast, the greenfield power plant is expected to come online in 2018 and run for 25 years. 1MDB will build the plant with partner Mitsui & Co Ltd.

The sovereign wealth fund has invited banks including CIMB , Deutsche Bank, Goldman Sachs, Maybank, Morgan Stanley and UBS to make their underwriting pitches, people familiar with the matter said. The so-called beauty parade is slated for early March.

"After the beauty parade, there will be pressure to get this IPO done before the mid-year ends," a person with direct knowledge of the matter said.

1MDB officials were not immediately available for comment on the IPO process. Representatives for the banks declined to comment.

The list of banks has been whittled down after a dozen banks made proposals in the initial stage of the process in January, the people said.

CHANGE OF AUDITORS

Key criticisms levelled at the fund include massive fees paid to Goldman Sachs for managing bond offerings, according to Thomson Reuters publication IFR.

Defending its most criticised bond placement, 1MBD said it wanted to ensure a timely completion of a joint venture with Abu Dhabi's Aabar Investments PJS to pursue energy and real estate projects in Malaysia and the Middle East.

1MDB's profits to date have been largely due to the revaluation of land bought cheaply from the federal government, according to its previous financial results seen by Reuters.

It has also delayed the release of annual accounts for the financial year ending March 2013 and on Feb. 21 announced it was replacing its long-standing auditor KPMG with Deloitte.

"This is nothing special or new as it is in line with best market practice where companies decide on its current or future auditors after considering all aspects, including but not limited to conflict of interests and other consideration," 1MDB said on its website.

It is due to release those financial results by the end of March 2014.

In response to criticism about funds transferred to the Cayman Islands, 1MDB has stressed that its fund is regulated by the monetary authorities in the Caymans, Switzerland and Hong Kong and it has invested the proceeds with regulated and licensed international fund managers.