This article first appeared in The Edge Malaysia Weekly on December 26, 2022 - January 1, 2023

BORSIG GmbH has long been known as KNM Group Bhd’s crown jewel, for which it had to borrow a lot of money in 2008 to pay its princely sum of €350 million cash.

Because of its debt obligations and tight cash flow, KNM has to part with the 170-year-old German engineering company to raise money to pare down its RM1.21 billion borrowings, although it is a major income contributor.

Somehow, unlocking asset value has always been a catalyst driving KNM’s share price over the years.

It is apparent that the company has two options: either a straightforward asset sale or an initial public offering (IPO) to unlock the value of Borsig.

In May, KNM found a buyer for Borsig. It entered into a conditional agreement with GPR Siebzigste Verwaltungsgesellschaft mbH (now Vorsprung Industries GmbH) to sell all of Borsig for €220.8 million (RM1.03 billion). At that point in time, the board might have thought it had given the investing fraternity a glimmer of hope that KNM could turn around.

As the saying goes, however, there’s many a slip ’twixt the cup and the lip.

About six months later, KNM announced that the deal had fallen through, citing the reason it decided not to extend the deal’s long-stop date from the latest Nov 30 deadline. The board said it was not convinced that the closing conditions, particularly regarding financing of the proposed disposal, would be satisfied swiftly.

Based on KNM’s remark, one might understand that the prospective buyer seemed to be encountering issues in obtaining credit facilities to fund the acquisition. Others might raise the question of whether the difficulties in getting financing was a reflection of asset quality.

It is worth noting that KNM’s stock price plunged more than 30% to 14 sen when it unveiled its plan to sell Borsig for RM1.03 billion — below its investment cost.

With hindsight, the heavy selldown came about as the investing fraternity realised that KNM’s crown jewel could fetch only RM1.03 billion. Like it or not, this has made the company’s story on unlocking value less exciting than before. Furthermore, KNM will lose its core income contributor after the sale and the company’s earnings prospects will be uncertain.

It was later explained that KNM had accumulated €212.84 million in dividends from Borsig over the years. In other words, KNM’s investment in Borsig has yielded reasonable gains. Still, it cannot be denied that the crown jewel is now worth less than KNM had paid for it.

KNM commented that it did not choose the IPO route because creditors could not wait that long for the listing exercise to materialise. In fact, many were already sceptical about KNM’s ability to execute its plans.

The stock price tanked further, falling from 10 sen on Oct 27 to four sen on Nov 1, when the company told the investing public that the deadline for the sale had been postponed by another month to Nov 30.

The delay dragged KNM into Practice Note 17 (PN17) status. Its auditors highlighted a material uncertainty on its ability to continue as a going concern, as its shareholders’ equity on a consolidated basis was 50% or less of its share capital.

The company is now at risk of being delisted if it is unable to submit a regularisation plan within the one-year timeframe stipulated by the stock exchange.

Meanwhile, at a critical moment, the company’s CEO Tan Koon Ping stepped down “to pursue other interests”. It is also worth noting that the shareholding of the company’s founder Lee Swee Eng has shrunk to 7%, from 22% more than 10 years ago.

Concerns over KNM’s financials mounted, as it had defaulted on US$23 million (RM102 million) and €68.5 million worth of credit facilities. In a nutshell, with the Borsig sale falling through, KNM defaulted on its debt obligations.

In November last year, KNM had already missed a THB2.78 billion (RM352.57 million) principal and coupon payment for the debt papers it issued in Thailand.

When the asset sale hit a snag, attention was also drawn to its substantial shareholder, MAA Group Bhd, as the value of its investment had shrunk substantially. MAA invested RM82.27 million in KNM in 2021. Its 9.21% stake is worth RM17.3 million, based on KNM’s share price of five sen.

MAA bought into KNM because it saw the potential windfall from the listing of Borsig. Nonetheless, MAA’s wish seems to have been granted now, as the sale was scrapped.

In mid-December, KNM’s board approved Borsig’s flotation on the Mainboard of the Singapore Exchange via an IPO, “with a view of achieving a market capitalisation of up to US$300 million, or its Singapore dollar equivalent, and a placement of 49% of the enlarged capital comprising vendor and/or new shares”.

KNM has once again roped in PrimePartners Corporate Finance Pte Ltd and appointed Manifold Partners to assist in the IPO. This means KNM is working concurrently on two IPOs in Singapore.

To recap, PrimePartners has also been appointed the adviser for the proposed listing of KNM’s wholly-owned unit FBM Hudson Italiana SpA and FBM-KNM FZCO on Catalist, the sponsor-supervised board of the Singapore Exchange Securities Trading Ltd. The listing plan was announced in January and forms part of KNM’s restructuring scheme to revive its financial health. Only time will tell whether the two IPOs will happen.

This is not KNM’s first attempt at listing Borsig, as there was such a plan in 2012. Indeed, over the last decade, KNM has proposed and unveiled several corporate exercises, including privatisation and management buyout. So far, none has materialised, but the news swung its share price.

The flip-flop on the potential listing or sale of Borsig and the ensuing tumble into the PN17 category are the reasons KNM is included in the list of turkeys this year. MAA’s minority shareholders are unlikely to object to this turkey award.

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