Petronas Will Pay $263.2 Million To Buy Equity Interest in Proton
By LESLIE LOPEZ 
Staff Reporter of THE WALL STREET JOURNAL

KUALA LUMPUR, Malaysia -- After six months of negotiations Petroliam
Nasional Bhd. has finalized plans to buy a controlling equity interest
in Perusahaan Otomobil Nasional Bhd., or Proton, for about one billion
ringgit ($263.2 million).

Senior financial executives and investment analysts say that Petronas,
Malaysia's state-owned oil company, would be paying "fair value" for
Proton, the country's national car maker. But that won't be enough to
blunt criticism that the deal represents yet another case of Kuala
Lumpur using public money to bail out big businesses buffeted by the
regional economic crisis.

Petronas Chief Executive Tan Sri Hassan Marican said the national oil
company and Proton's current majority shareholder, debt-laden Hicom
Holdings Bhd., recently concluded talks over the sale of a 27.2% stake
in the national car company. "We have come to an agreement of a value,
and the value is within the range of the independent valuation," he
told a news conference, adding that pricing details would be announced
within three weeks.

Share Discount

Senior financial executives close to the deal say the transaction will
value Hicom's interest of 143.4 million shares in Proton at seven
ringgit a share. The deal values Proton shares at a 19% discount to
its current trading price of 8.60 ringgit at the Tuesday close.

"Seven ringgit would be fair value from Petronas's point of view. For
Hicom it appears a little cheap," said Jason Chong, vice president at
Merrill Lynch in Kuala Lumpur.

Hicom's sale of Proton is a two-stage transaction. Proton will first
acquire Hicom's other auto businesses, including a 32% stake in
national car distributor Edaran Otomobil Nasional Bhd. and several
automotive-component manufacturing companies. Once these units are
grouped directly under Proton, Hicom will sell its equity interest in
the national car company to Petronas.

Depleting Reserves

Analysts say Proton's move to acquire Hicom's stakes in companies
involved in the auto businesses will seriously deplete the national
car maker's cash reserves of roughly 1.2 billion ringgit. And through
the sale of Proton to Petronas, Hicom will raise just about enough
money to settle its debts of about 2.45 billion ringgit. The group
will then focus on businesses such as property development,
engineering and building materials. Hicom officials couldn't be
reached for immediate comment.

Petronas's plans to acquire a controlling interest in Malaysia's
national car project comes at a difficult time for the national oil
company. On Tuesday, the group posted a 32% drop in net profit for the
year ended March 31, to 6.81 billion ringgit from 9.95 billion ringgit
in the prior year. Tan Sri Hassan said the oil company expects
earnings to improve this year, bolstered by stable oil prices and the
regional economic recovery.

Petronas, Malaysia's sole Fortune 500 listing, announced plans to
acquire Proton in October, seven months after the oil company was
tapped to buy the shipping assets of a concern controlled by Prime
Minister Mahathir Mohamad's eldest son, Mirzan Mahathir. Industry
analysts and economists attacked the deal, saying car manufacturing
was an unnatural fit for a petroleum company.

Stretching Capabilities

What's more, analysts say that the takeover of the national car
project would only stretch the management capabilities of the
state-owned firm. In recent years, Petronas has expanded aggressively
into exploration and refining activities in South Africa, Syria,
Sudan, Angola, China, Iran, Algeria and Libya.

Petronas's diversification into the car business and the shipping
industry represents a serious setback in Malaysia's policy of putting
big public-works projects and strategic government-owned industries in
private hands. This so-called privatization program has been a key
pillar of Dr. Mahathir's economic agenda.

Proton, the national car company, is Dr. Mahathir's brainchild and a
source of national pride. Four years earlier, the government disposed
of a 32% interest in the auto maker's parent company, Hicom Holdings,
to publicly held Diversified Resources Bhd., a holding company
involved in assembling motor vehicles and other businesses.

In the initial years, the privatization of the national car project
proved successful. Proton flourished with its dominance of about 60%
of the national car market, while Hicom snared a host of privatization
projects from the government, ranging from running Kuala Lumpur's bus
system to collecting the city's garbage. But when the regional
economic crisis struck in mid-1997, Hicom began to feel the strain of
the huge debt load that it took on to finance many of its
capital-intensive privatization ventures.

Debt-Reduction Priority

Faced with the urgent task of cutting its debt, estimated at 2.6
billion ringgit in early 1998, the group decided to abandon its
interest in the national car project, say executives close to the
company. To present its case to the government, the officials said,
Hicom informed Dr. Mahathir's administration early last year that the
car company needed huge outlays of capital to finance expansion plans
if it was to compete in the international car market. Hicom also
admitted that it didn't possess the financial muscle required.

The executives close to Hicom say that Petronas immediately emerged as
a natural choice. Apart from its financial heft, Petronas had already
developed a prototype engine of its own through a joint venture with
Switzerland-based Sauber, an engine manufacturer for Formula One
racing cars.

On Tuesday, Tan Sri Hassan defended Petronas's diversification away
from the oil business, saying the company will continue to invest in
strategic national projects to support the national industrialization
program. But he dismissed widespread speculation that the oil company
is considering another corporate rescue with the purchase of a stake
in national air carrier Malaysian Airline System. "We have no plans.
We want to keep our feet on the ground."
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