Carlyle Knows Where Malaysia Is

When we travel overseas, many times we get flustered when people don't even know where Malaysia is located. Usually we end up explaining its that mass of land between Thailand and Singapore. Well, fret no more, the giant private equity unit with possibly the world's most connected retired personalities, is making a bid for QSR.



Ambank Research:

Kulim (M) Bhd (BUY, KULIM Mk Equity), parent company of QSR Brands Bhd (QSR Mk Equity, Non-rated) which in turn has 51% control of KFC Holdings Bhd (KFC), announced that it has received a non-binding offer for the entire 100% stake in QSR from Carlyle Asia Investment Advisors Ltd, on behalf of the Carlyle Group.

• No timeframe was disclosed for the proposed take-over bid, while trading of KFC shares has been suspended until further notice.
• The proposed take-over price of QSR by the Carlyle Group is RM6.70/share. This
represents an 18% premium to the earlier indicative proposed price of RM5.60/share offered by Idaman Saga Sdn Bhd. Recall, Idaman Saga, owned by Tan Sri Halim Saad and Datuk Che Mokhtar Che Ali, had back on 19 November 2010 offered to acquire QSR’s entire business and undertakings.
• We view Carlyle Group’s proposed take-over positively. At RM6.70/share, this translates to a 5% premium to our intrinsic valuation for QSR, as stated in our report on Kulim dated 19 November 2010.
• The Carlyle Group was founded in 1987 and has more than US$98bil of funds under management in multi-industries globally - from aerospace & defence to technology and healthcare. The Carlyle Group’s consumer & retail portfolio lists 38 varieties of companies worldwide.
• A change in ownership could be beneficial to KFC, as the group would be unencumbered with further related-party transactions involving ultimate parent company, Johor Corporation. RPTs involving the group and Johor Corp companies amounted to RM28mil as of July FY10.
• No change to our BUY recommendation with an unchanged fair value of RM4.15/share based on PE of 20x FY11F earnings, pending further corporate developments. The proposed takeover by Carlyle Group is also subject to approval by KFC franchisor Yum! Brands Inc.



As a side issue, my initial reaction is why doesn't a Malaysian company or government vehicle buys QSR (Halim Saad does not count). Then I came to the conclusion that it should not matter. It is not a time nor the place for nationalistic fervour. I do agree that there are certain assets that should not be controlled by foreign interests such as utilities, military or services that are critical to the country. Anything else should be fair game.

If we wish to be an open economy and attract foreign investments, we have to be open to foreign buyers for our banks or even jewels such as KFC (don't ask why I think KFC is a jewel la...). We should welcome FDI in any form as long they are in for the long haul.

My view on QSR or KFC is that there is upside from here on, but you have to hold for a couple of years to see substantive returns. I think investors in general are still not fully appreciative of its India link up.