The Sarawak Government finally revealed its plan on how to salvage its billions of ringgit invested in state-owned wafer fab 1st Silicon (Malaysia) Sdn Bhd.

Speaking in the state legislative assembly today, state Second Finance Minister Wong Soon Koh said state government 97%-owned 1st Silicon had signed a merger agreement with Germany's X-Fab Semiconductor Foundries AG on March 22, 2006.

"Under the merger exercise, the shareholders of 1st Silicon and X-Fab will inject their respective assets into a newly merged company called X-Fab 1st Silicon Foundaries Semiconductor," the minister said.

In return and under the new enlarged entity with assets and plans present in Malaysia, Germany, the US and the United Kingdom, both shareholders - State Government of Sarawak and X-Trion ( X-Fab) - would own about 35% and 65% respectively in the new merged company.

The minister was responding to a query from Wong Ho Leng (DAP-Bukit Assek) who wanted to know the details of the merger agreement, such as proposed equity for and propose capital investment of the foreign partner, as well as how this could help or salvage 1st Silicon in recovering its accumulated losses.

Based on 1st Silicon's annual returns for years 2000 to 2004, the company suffered accumulated losses of up to about RM2.5 billion. The 2005 accounts were not available as the company had obtained a certificate of exemption to file its accounts for last year to the Companies Commission of Malaysia (CCM).

Ist Silicon is situated in the Sama Jaya Free Industrial Zone on the outskirts of Kuching City.

The minister admitted that due to several factors, including what he called the worst global semi-conductor industry downturn and global inventory correction from 2001 through to the third quarter of 2005, 1st Silicon's performance was badly affected.

Ninety per cent of its 1000 employees are Sarawakians, he said.

Broader product range

On the prospects of the joint venture, the minister said the government expected the merger to transform 1st Silicon into an entity capable of providing a broader range of products, wider geographical reach and a business model which focuses on products with a longer shelf life with stable pricing.

X-Fab also has a proven profitable business model and is one of the most established market leaders in analog business with strong technical expertise in niche market technologies, Soon Koh added.

"This merger will now allow us to be a global player in the semi-conductor industry," the minister said.

To a related written question from Chong Chieng Jen (DAP-Kota Sentosa), Soon Koh said prior to the signing of the merger agreement 1st Silicon carried out what he called an Islamic financing scheme in order to restructure the company.

The minister said this involved the sale of certain assets of the company to a special purpose vehicle (SPV) which is the international bondholders, giving gains of RM850.322 million on the disposal.

"This amount raised from the sale enabled the company to refinance its existing debts," he said.

Later, the minister declined to disclose the amount raised, but added that the 5.7% rate payable to the bondholders represented a substantial savings.

Having done this, 1st Silicon would have greater financial flexibilities going to the merger exercise.