KINIBIZ The Selangor state investment arm Kumpulan Darul Ehsan Bhd (KDEB)'s RM9.65 billion offer to consolidate the water sector seems to have hit a brick wall yet again, with two of the important players, Puncak Niaga Holdings Bhd and Gamuda Bhd, declining to accept the offers made.

This confirms a Kinibiz story earlier this month that the water consolidation exercise had hit a snag.

In an announcement to Bursa Malaysia (the stock exchange) yesterday, Puncak Niaga, which has two concessions, one to treat water under wholly-owned Puncak Niaga (M) Sdn Bhd (PNSB) and another under 70 percent-controlled Syarikat Bekalan Air Selangor Sdn Bhd (Syabas), which has the mandate to distribute water in Selangor, Kuala Lumpur and Putrajaya, basically shafted Selangor's offer, saying that there was insufficient information provided.

Puncak Niaga said its board had "expressed great concern over the indicative terms of the offer" and the responses to queries it had made, from KDEB, the Selangor government and Pengurusan Aset Air Bhd (PAAB).

In a nutshell, Puncak Niaga's grouses are that the net proceeds it will receive from KDEB for the proposed purchase of PNSB and Syabas amounts to RM1.55 billion only, in contrast with the total equity value of RM5.59 billion as stated in the offers from KDEB.

The bone of contention is that "There shall be no further consideration to be paid to Puncak Niaga, apart from the proposed RM1.55 billion," Puncak Niaga said in its announcement to the bourse.

Another grouse of Puncak Niaga is that the amount of consideration payable is still subject to due diligence to be undertaken, post acceptance.

It added that PAAB had only verbally agreed in principle to take over the water assets of PNSB and Syabas at the total value of RM4.04 billion.

Another major issue is with a 37 percent and 25 percent tariff hike respectively slated for 2009 and 2012, as per Puncak Niaga's concession agreement, which had been opposed by the state.

In response to Syabas' claims for compensation on the two tariff hikes, Selangor Menteri Besar Abdul Khalid Ibrahim had said that since the issue was still being heard in the High Court in Kuala Lumpur, "the Selangor state government is not able to give any confirmation on the payment of the said compensation."

Outstanding liabilities amount to RM3.91 billion

Puncak Niaga's outstanding liabilities as at end December 2012 (due from PNSB and Syabas) to Acqua SPV Bhd, which is PAAB's unit, amounted to RM3.91 billion, and had to be fully resolved regardless of any offer or mechanism to be implemented in the proposed consolidation.

PAAB, in response to queries from Puncak Niaga, had said that the mechanisms and details of the proposed offers should be discussed and clarified between the KDEB and Puncak only, and that any query on the proposed offers should be forwarded to KDEB only.

"The response from PAAB clearly contradicts the response from KDEB," Puncak Niaga said.

The company also said it was willing to accept the offers, provided KDEB agreed to a total equity contribution to be paid to it, including a compounded return of 15 percent a year taken as compensation to Puncak Niaga for the loss of future income as a result of the sale of its water concession business, and that the receivables due and outstanding from Syabas to PNSB at the effective date of the sale shall be paid to Puncak Niaga.

Other terms demanded by Puncak Niaga include any and all residual cash in PNSB and Syabas to be paid to it, the removal of the requirement of due diligence post acceptance of the offers, and a waiver of the requirement for the acquisition of the water assets by PAAB, concurrently with the acquisition of the equity by KDEB.

"As KDEB is acquiring the equity of the water concession companies, the concession holders should be paid first on the agreed price by KDEB, and KDEB can then separately settle its arrangement with PAAB for PAAB to take over the water assets and assume the borrowings," Puncak Niaga added.

Three reasons why Gamuda cannot consider

Meanwhile, Gamuda, which has a 40 percent equity interest in water treatment company Syarikat Pengeluar Air Selangor Holdings Bhd (Splash), said it was unable to consider the offer due to three reasons.

These are the removal of a key component in the earlier offer letter dated Feb 20, 2013, on the payment of Splash's surplus book value of assets over liabilities which has resulted in the substantial amount of surplus assets of Splash not being added to the offer; the valuation methodology of using a return on Splash's equity of 12 percent a year is not fair as it does not take into account the remaining tenure of Splash's concession; and that KDEB had not indicated in its offer if it will retain the existing operations and maintenance operators of Splash at existing terms after the completion of the proposed purchase.

However, Gamuda said it would "continue to seek further clarifications on the matters raised... for all parties involved to reach mutually agreed terms and conditions... subject to all matters being satisfactorily concluded and agreed upon, is willing to pursue an agreement with KDEB".

Splash's other shareholders are Kumpulan Perangsang Selangor Bhd (KPS) a unit of KDEB and The Sweet Water Alliance, a company linked to businessman Wan Azmi Wan Hamzah.

The only other sizeable water player is Konsortium Abass Sdn Bhd, which is almost wholly owned by the state.

Basically, the water industry hinges on the three treatment companies, PNSB, Splash and Konsortium Abass, selling treated water to Syabas to distribute.

However, without the two tariff hikes, 37 percent in 2009 and 25 percent in 2012, Syabas has been unable to pay the treatment companies.

The state government stated that Puncak had not fulfilled its end of the bargain and had not complied with the terms of its concession agreement.

Meanwhile, Syabas is suing the state government for RM2.97 billion in claims.