The family of a low-key Malaysian tycoon — the Chengs — are believed to be eyeing the gaming business of the soon to be privatised Tanjong plc. Sources say that at least one international merchant bank has been hired to look into it.

“They are looking into the deal and so far have arrived at a valuation of about RM2 billion for the entire business. Should the Chengs decide to bid for it, the proposed acquisition will be done in a private capacity,” says the source.

It is unclear if the Chengs will put in a bid on their own or be part of a group pitching for the gaming business. “But it’s likely that they will partner a private equity fund,” say sources.

Apart from the Cheng family, the other party who could be vying for Tanjong’s gaming business is the Genting group.

“Four years ago, when Tanjong expressed interest in selling the business, Genting and Multi-Purpose Holdings Bhd had said they were interested. But pricing was a problem,” says a source. Genting does not have a NFO business, while Multi-Purpose does through Magnum Corp Bhd.
The Cheng family — headed by Datuk David Cheng — is from the Klang Valley. The family is in the gaming slot machine business, mostly in the Klang Valley, and in the food and beverage industry.

One of David’s two sons, Datuk Douglas Cheng, teamed up with Datuk Vincent Tan Ting Wong and Henry Yip to establish the popular Chinese restaurant chain Dragon-I six in 2004. Earlier this year, Douglas, who is in his 30s, teamed up with another restaurateur to bring into Malaysia one of Singapore’s top Italian restaurants, Il Lido.

News of the Cheng family looking into Tanjong’s gaming business comes hot on the heels of  reports that Tanjong is looking to sell its gaming arm post-privatisation.

There were already clues that Tanjong could split up the group’s businesses in its circular to shareholders, released on Aug 20, about the offer to take the conglomerate private. In the circular, Tanjong noted that it has ambitions to be a global player in the power generation industry by pursuing development opportunities in such areas as the Middle East, Africa and Southeast Asia.

It added that Tanjong Group, under its current structure, would not have sufficient capacity to achieve these ambitions and will therefore need to be restructured and recapitalised to meet the prospective long-term investment and debt profile, which will result in higher borrowing costs and translate into medium-term earnings volatility.

The circular went on to add that syariah-compliant and many Malaysia-based institutional investors are not able to invest in Tanjong Group’s growing power assets given that the group is currently involved in gaming.

Tanjong’s gaming segment consists of its numbers forecast totalisator (NFO) and racing totalisator (RTO) businesses. It is no secret that while the company’s NFO business has had a good streak, its RTO business has been in the red.

For FY2010 ended Jan 20, the NFO locked in an operating profit of RM234.9 million, a stark contrast to the RM65.8 million operating loss of the RTO business. Tanjong’s earnings before interest, taxes, depreciation and amortisation (Ebitda) for its NFO business has been a healthy RM173 million to RM244 million from 2006 to 2010. As at Jan 30, the Ebitda of its NFO segment stood at RM241 million.

Its RTO business, meanwhile, saw operating losses between RM7.7 million and RM65.8 million. For FY2010, the RTO business reigistered an operating loss of RM65.8 million, RM38.9 million higher than the RM26.9 million loss recorded in the previous year. This was due primarily to escalating totalisator expenditure incurred and charged by the turf clubs. As such, the operating profit for Tanjong’s gaming segment fell by RM41 million to RM169 million, from RM210 million, principally due to rising operating expenses in the RTO business.

According to a UOB Kay Hian report, the losses from the RTO business could hit RM80 million for the current financial year.

Gaming analysts are mixed on the possible RM2 billion price tag. “It is on the steep side given that the RTO arm is bleeding. Modelling estimates show that the gaming business of Tanjong could make RM100 million in net profit this year. However, should it be RM2 billion for the NFO business alone, that would translate into about 15 times earnings, which is fair,” says a gaming analyst.
Another gaming analyst believes the price is fair as it gives the buyer an avenue into the
NFO business — where licences are scarce.

A director from a gaming company, meanwhile, believes that a price of RM2 billion and below is justifiable. “The licence is given to the turf club, so the company would need to go through the Totalisator Board for approval as well as the Ministry of Finance. But of course, the licence is worth a lot. [The buyers] would need to balance the gaming structure of both the RTO and NFO businesses,” he says.

He adds that the NFO remains a lucrative business despite the added 2% tax imposed by the government this year. “It also [depends] on how you price your games. Also, we in the industry as a whole are lobbying the government on the added tax … whatever duty is imposed will be an advantage to the illegal operators,” the industry player notes.

Tanjong’s gaming arm, Pan Malaysian Pools Sdn Bhd, is estimated to have about 24% market share, the lowest of the country’s three players. Tan’s Berjaya Sports Toto Bhd has a market share of about 40% while Magnum Corp Bhd’s stands at 36%.

According to Tanjong’s FY2010 annual report, the RTO business is planning to increase the number of simulcast races from other countries such as Australia, South Africa, Japan, Hong Kong and Macau.

As at Jan 31, Tanjong’s NFO and RTO segments had assets worth RM58.3 million and RM72.3 million respectively. Liabilities stood at RM90.6 million for the NFO arm and RM49 million for RTO.
Tanjong’s privatisation is a done deal. The offer to take the company private at RM21.80 per share became unconditional two weeks ago, after more than 90% of valid acceptances were received by Sept 13.

What’s interesting now is what will happen to the businesses of Tanjong post-privatisation. Which bits will be sold off, to whom and at what price? And of course, which businesses in its stable will make a comeback to the market?

This article appeared in Corporate page of The Edge Malaysia, Issue 825, Sep 27-Oct 3, 2010