A Stake in Sime Darby for China?Possible ?

Sime Darby Berhad, the plantation-to-power conglomerate that is one of the world’s largest palm oil companies and also with extensive interests in the Middle Kingdom.

This unprecedented step was taken recently by the Najib administration and signals a move by the government to sell down its holdings in government-linked companies (GLCs) as well as to strengthen strategic ties with certain countries by allowing them or their investment arms to hold equity in Malaysian blue-chip GLCs.

The Malaysian Insider has learnt from government sources that Prime Minister Najib discussed the plan to offer up to 10 per cent of Sime Darby for sale to China at a recent Cabinet meeting.

There was strong support for the idea, seen as a move to firm up linkages between Malaysia and the powerhouse economy.

Following the Cabinet meeting, the government informed the Chinese government officially of its intent to offer it a stake in Sime Darby. It is unclear if the targeted buyer is China’s investment agency or any particular state-owned company.

Government sources said they do not expect Sime Darby’s major shareholders — Permodalan Nasional Berhad or the Employees Provident Fund (EPF) — to sell down their stakes. Instead, it is believed Sime Darby will issue new shares.

Listed in the Bursa Malaysia, Sime Darby shares closed 3 sen higher to RM8.23 yesterday (9 September 2009).

For the diversified multinational, selling a small stake of the company to a heavy hitter investor comes at a good time for its plantations, property, industrial, motors, and energy and utilities divisions. It also has interests in health-care.

The Group recently recorded a steep 41 per cent drop in profits and analysts have been asking serious questions about whether the group should shed some of its divisions and focus more on its staple palm oil business. Having an influential Chinese company as a shareholder will be especially helpful as it tries to expand its footprint in China.

Sime Darby counts China as one of its top markets for palm oil and has significant interests in motor, industrial equipment and ports in China.

The addition of a cash-rich investor will also help Sime Darby fund the expansion of its oil palm acreage. More importantly, the strategic tie-up will give the company a much needed boost.

For Malaysia, the decision to offer a stake in its prized corporate jewel signals a willingness by the government to open up its GLCs to foreign ownership. Its banking conglomerates have gone the other way with both CIMB and Malayan Banking aggressively expanding throughout Southeast Asia.

The current Sime Darby is from an early 2007 merger of Sime Darby Berhad, Kumpulan Guthrie and Golden Hope, all units within the Permodalan Nasional Berhad group of companies.

The original Sime, Darby & Co, was established in 1910 by European businessmen William Sime and Henry Darby, to dabble in the lucrative rubber industry before diversifying to cultivating oil palm and cocoa.

I think this story is palatable even though Sime Darby has earlier on denied it.