DEALTALK-Markets buzz with talk of China-Sime Darby deal

* Deal may boost Sime's China businesses, open opportunities

* Could raise $1.6 bln, fund Sime's expansion

* May help China meet edible oil supply

* China President Hu in Malaysia Nov 10-11 (For more Reuters DEALTALKS, click [DEALTALK/])

By Julie Goh and Soo Ai Peng

KUALA LUMPUR, Nov 4 (Reuters) - With China's President Hu Jintao visiting Malaysia next week, speculation is swirling the Malaysian government may finally seal a deal to sell 10 percent of planter Sime Darby (SIME.KL) to a Chinese group.

Media reports that Malaysia had offered China the stake in Sime, the country's biggest palm plantation firm by land ownership, first emerged in September, but were dismissed by Prime Minister Najib Razak as pure speculation. [ID:nKLA010404]

The chatter about the agreement that could be worth about $1.6 billion, is back, with one investment bank spelling out likely implications of the possible deal.

"Sime Darby could also spin off its plantations business, with a Chinese state-owned company taking a direct stake, since there would be little strategic value in its property and car businesses," said the research report, obtained by Reuters through an investment banking source.

The source was not authorised to have the bank's name cited because the report was meant for internal use.

Sime did not reply to an email from Reuters on the market talk. Based on Sime's market value, a 10 percent stake would raise $1.6 billion.

The company's China operations accounted for 11-12 percent of its revenue and 3-4 percent of operating profit in fiscal 2008 and there is strong potential for growth given the size of China's population.

Sime shares have jumped 71 percent this year, outperforming a 42 percent rise in the broader market index .KLSE and a 57 percent gain in the plantation index .KLPL.

The Malaysian government and various state funds own almost 70 percent of Sime, the country's largest company valued at about $16 billion, and Najib has said he wants companies with close links to the government to become more efficient. [ID:nKLR467124]

WIN-WIN DEAL

China's strategic backing will enhance Sime's business in the country, where it is involved in motor and heavy equipment distribution, water treatment services, port operations, property development and palm oil sales and marketing.

Hu visits Malaysia from Nov. 10 to Nov. 11 on his way to the APEC meeting in Singapore, and will hold talks with Najib.

Analysts have previously said Sime needs a big overhaul, including possibly listing its prized plantations business and selling its underperforming motor unit, to boost valuations and compete better with fast-growing rivals. [ID:nKLR380471]

The deal, if it materialises, is expected to serve the national interests of both countries as well as Sime's, which has invested $1 billion in six business segments in China.

The research report said China is keen to dilute Singapore-listed Wilmar's (WLIL.SI) dominance in the Chinese edible oil market, and may see the Sime investment to pursue this, said the investment bank's research report.

Wilmar plans to list its China business to tap investor interest in the biggest market and to raise cash for acquisitions. [ID:nSIN488550]

Sime's top management has been promoting its strategy of entering China's edible oil market in global roadshows in recent months and the stake sale could help fund that expansion.

Referring to the possible deal, the research report said: "While it is a noble idea and has the blessings of the Chinese government, execution remains the underlying risk."

By finalising a deal with Sime, China, which imports a third of its edible oil demand, stands to lock in future supplies with demand growing at about 5 percent per year.

China is Malaysia's main market for refined palm products, importing about 300,000 to 400,000 tonnes of refined palm olein a month.

Sime currently exports about 10 percent or 200,000 tonnes of its palm oil to China. Malaysia is the second biggest palm oil producer in the world, after Indonesia.

Refined palm olein is used as a cooking oil and for the production of noodles, soap and margarine.

China has aggressively eyed commodity-related assets overseas, including the now aborted $19.5 billion deal to acquire a stake in Rio Tinto (RIO.AX) (RIO.L) and more recently, the $7.2 billion takeover of Canada's Addax Petroleum by Sinopec. [ID:nSYD426723] [ID:nBNG477261] (Additional reporting by Michael Flaherty in HONG KONG)