Going Private Could Be Next Step for Malaysia’s Proton, Analyst Says

DRB-Hicom will take car maker Proton private, and its independence from the government and the public will give it much greater flexibility in making difficult business decisions, a Malaysia-based auto analyst predicts.

Government investment company Khazanah Nasional says it is selling its 42.74% in Proton to DRB-Hicom for RM5.50 ($1.75) a share, or RM1.29 billion ($409.9 million).

The price values the company at RM3.02 billion ($959.6 million).

Khazanah’s sale of its 234,734,693 shares generates a mandatory general offer for the remaining Proton script at RM5.50, and Kavan Mukhtyar, Frost & Sullivan automotive partner and transportation practice head for Asia/Pacific, says he expects DRB-Hicom will use this to take Proton private.

Khazanah received a number of proposals in recent weeks and a comprehensive evaluation was conducted based on several criteria including financial resources and a commitment to maintain Proton’s operational integrity.

“DRB-Hicom’s proposed strategy and business plan provides an effective platform to enhance Proton's sustainability and meet its long-term growth needs,” it says in a statement.

Proton Chairman Nadzmi Salleh was the only other identified bidder for the company founded by the Malaysian government in 1983 as a car assembler. Proton now is Malaysia's largest auto manufacturer and the only homegrown and indigenous OEM car maker in Southeast Asia.

Mukhtyar says the sale to DRB-Hicom is a practical approach, as Proton will remain Malaysian-owned while gaining access to global partners.

“To be competitive Proton needs economies of scale, high levels of capacity utilization and access to technology and markets,” he says in a statement. “DRB-Hicom can leverage its global distribution and assembling alliances to achieve this.

“It could potentially do contract assembling for other global partners in Malaysia and increase capacity utilization of Proton's assembling units. This may open assembling opportunities not just in Malaysia but the regional markets.

“Proton may also potentially get access to other developing markets through the global partners.”

Proton says its independent directors will seek clarification as needed to ensure the purchase proposal is in the interest of shareholders.

Mukhtyar expects critical efficiency improvements to be made medium-term to improve Proton’s competitiveness.

“However, initially the focus will be on quick gain opportunities to add new revenue streams to Proton’s portfolio, like contract assembling,” he says. “Turning Proton private will also give the DRB-Hicom group ability to streamline its own automotive assets in the context of Proton being part of the group.”

Proton’s 2011 results have not been released, but its sales rose 6% in 2010 to more than 157,000 units.

“If managed correctly, Proton could unlock its full potential in the regional automotive market,” Mukhtyar says.

Frost & Sullivan believes the privatization of Proton could further liberalize the Malaysian auto market in the medium term and attract more interest from global automotive majors.

“This will enable Malaysia to attract further investments in the automotive sector,” he says. “In the medium to longer term, vehicle prices in the mass-market segment would go down. This will expand the market potential and eventually benefit consumers.”

But Mukhtyar says a change of this magnitude undoubtedly will come with some pain.

“In the short term there will be several changes in the Malaysian automotive industry, with a push towards consolidation and rationalization across the value chain,” he says.

“In the global automotive marketplace only the fittest survive and prosper. The future direction of (the) Malaysian automotive industry remains positive yet certainly with intense competition.”