KNM aborts €20m purchase of Belgium’s Ellimetal

KUALA LUMPUR (TheEdge021208): KNM Group Bhd has terminated plans to buy Belgium-based Ellimetal NV for €20 million (RM91.7 million) after the vendor was unable to fulfil one of the conditions in the master agreement signed in January this year.

“The key objective for KNM in most acquisitions is to acquire the expertise of the target companies. In this case, the owner and the key management team are not staying in the company after KNM’s take over,” a company official told The Edge Financial Daily.

He added that the owner wanted to retire because of old age and the rest of the key personnel were reluctant to continue under a different owner.

Under the agreement signed earlier, Ellimetal managing director Lambert Geerkens was required to continue serving in the same capacity for two years. Similarly identified key personnel needed to sign a minimum of two years service contract with the company from the date of completion of the acquisition.

According to the company official, the valuation of Ellimetal was based on eight times its financial year ending Dec 31, 2008 earnings. There was a net profit guarantee of not less than €2.5 million in FY2008.

This is not the first time KNM scrapped plans to buy companies. In May this year, KNM did not proceed with the purchase of Pisces Engineering Sdn Bhd for RM50 million. Last year, KNM aborted a deal to acquire a 90% equity interest in Virgo Pulse Sdn Bhd for RM27.5 million cash.

However, the company official said KNM would discuss with Ellimetal to enter into a commercial co-operation agreement following the failed acquisition.

At KNM’s analyst briefing last Friday, the company had guided for lower earnings for FY2008 and FY2009 after taking into account a one-off facility fee, the aborted purchase of Ellimetal and delay in capacity expansion plans.

“KNM’s management has revised downwards its earnings guidance for FY2008 net profit to RM400 million from RM430 million previously and FY2009 net profit to RM650 million from RM700 million,” OSK Investment said in its note.

The company said FY2008 earnings were revised downwards due to the one-off facility fee on its Maybank loan while FY2009 earnings were lowered after removing Ellimetal’s contribution and not taking into account the proposed capacity expansion by an additional 10,000 tonnes capacity at its Canada plant.

The proposed capacity expansion at its Canada plant was to cater for oil sands development, which essentially is extraction of oil from sand.

The company official said oil sands were not commercially viable with crude oil price hovering between US$50 to US$60 (RM181.50 to RM217.80) per barrel, hence its decision to put its capacity expansion plan on hold.

“Oil sands development is only viable with oil prices between US$70 and US$80 per barrel. There is now a slowdown in the capex cycle for oil sands projects but so far, no projects are being taken out,” he added.

However, he said KNM was asked to delay production for the oil sands project by its clients by between three to six months with the hope of capturing lower labour costs.

Meanwhile, Aseambankers Research, which downgraded KNM to a hold with a revised target price of RM1.02, has trimmed core net earnings by 1% for FY2009 and 3% for FY2010