Doubtful direction for JCorp

MB Johor Dato’ Ghani Othman announced the proposal for JCorp to acquire QSR and KFC, via an SPV Massive Equity Capital Sdn. Bhd. a few days ago.

‘JCorp intends to keep KFC and QSR’

Published: 2012/01/04

Following is Bernama’s question-and-answer session with Johor Menteri Besar and Chairman of Johor Corporation (JCorp) Datuk Abdul Ghani Othman on KFC Holdings Bhd and QSR Brands Bhd privatisation.

Q1: How does JCorp aims to acquire KFC Holdings Bhd (KFC) and QSR Brands Bhd (QSR)?

A: JCorp proposes to acquire 100 per cent of KFC’s and QSR’s business and undertakings through a special-purpose vehicle, Massive Equity (ME) Sdn Bhd. Massive Equity is majority-owned by JCorp (51 per cent) with CVC Capital Partners (CVC) owning 49 per cent. The offers were made at a price equivalent to
RM4 per KFC share and RM6.80 per QSR share. When the transaction is completed, JCorp’s stake in KFC will increase from 17 per cent to 51 per cent, while its interest in QSR will increase from 33 per cent to 51 per cent.

Q2: Have KFC and QSR accepted the ME (JCorp/CVC) offer?

A: Both the KFC and QSR boards have given the greenlight to the buyout offer made by JCorp and CVC, seven days after the offer was made; and their respective boards have also stressed that they are not seeking alternative bids from other parties. The next step is for the proposal to be presented to the shareholders of KFC and QSR for their approval.Q3: What is the rationale behind the ME offer for KFC and QSR? Who is driving this transaction and what are the benefits?A: This is part of the overall JCorp rationalisation programme for its various divisions to focus on their core businesses. For example, via this restructuring, Kulim would exit the food retail business and focus on plantations. In fact, JCorp is reviewing all of its assets with a view to making them more efficient, while growing them in a focused manner and generating greater value.

JCorp is a state-owned entity and the Johor State Government is driving the overall rationalisation programme (including this transaction) to ensure the long-term sustainability of JCorp. We want JCorp to be a profitable SEDC, enabling it to play a significant socio-economic role in the state for the benefit of the rakyat. The transaction allows JCorp to directly access the
cashflow of the two businesses compared to the current convoluted structure.

Q4: Why was CVC enlisted by JCorp to participate as its minority
partner in this transaction?

A: CVC was brought in to help further improve the businesses of KFC and QSR. They were chosen carefully (among various alternatives) based on their strong track record and vast experience in managing similar businesses and investing in our region. They are friendly value-added partners who will work
with us to ensure an even better KFC and QSR in the future.

Q5: Will JCorp incur any new debts from KFC and QSR acquisition?

A: This acquisition will be funded via a combination of cash (equity) and debt. However, the debt we are incurring is not at JCorp itself. Rather, it is at the acquisition company level, relying on the strength of the cash flow of the two businesses.

In addition, JCorp’s current debt is being resolved. For example, JCorp’s sale of palm oil plantations to Kulim (which was recently approved) is part of our plan to fulfil JCorp’s 2012 debt obligations.

The RM700 million cash accruing from the estates sale is the first part of the expected RM1 billion cash to be generated for debt repayment prior to July 31, 2012 (being the due date for the bond repayment). The balance of RM300 million will come from internally-generated funds. As for the remaining JCorp
debt obligations, we are finalising the repayment plan with advice from CIMB as our financial advisor. As part of the exercise, CIMB and Maybank will act as Joint Lead Managers for the issuance of new bonds in 2012.

Q6: Is this move a sell-out to outsiders and foreigners by JCorp as alleged by the Malay Chamber of Commerce?

A: This is not a sell-out to foreigners or outsiders. On the contrary, JCorp is actually privatising QSR and KFC to keep it within JCorp directly, whilst at the same time increasing JCorp’s holdings in QSR and KFC from 33 per cent and 17
per cent, respectively, to a majority of 51 per cent.

This is merely an internal reshuffle to make the corporate structure of JCorp Group more efficient. The move will also present Kulim Berhad, which is currently the controlling shareholder of QSR, an opportunity to dispose its
stake in the food retail business and focus on its core plantation business.

Q7: Does JCorp plans to retain KFC and QSR within the group or farm them out to other bidders?

A: JCorp Group has always maintained that it intends to keep the two businesses within the group believing in their long-term value. JCorp does not intend to sell this assets or flip them to a third party or strip their assets for cash. The entire transaction is premised on keeping the asset within the
group. So it is baseless to claim otherwise. Had the intention been different, the businesses would have been sold much earlier.

Q8: Are QSR and KFC considering other offers?

A: In addition to JCorp’s clear message that it won’t sell, the intention not to entertain any other bids has also been made clear by both the KFC and QSR boards.

Q9: Will this move in any way harm Bumiputeras and/or the people’s interests?

A: I wish to state clearly that KFC is a franchisee, so it is not a Bumiputera-only outlet, nor is it stated anywhere that it should only be owned by Bumiputeras. It is open to everyone. On the other hand, JCorp as a state government agency will continue to safeguard the interests of the rakyat, including in developing the Bumiputera community through various means. It has achieved many successes in this field and will continue to do so, not least by being more focused and profitable in its core businesses.

Q10: Is there any other “cheaper” way to execute the proposed acquisitions as claimed by some quarters?

A: There is no cheaper way for a third party to acquire QSR and KFC. Of course, acquiring Kulim’s shares (as proposed by the Malay Chamber) may appear to be a way to gain control of QSR and thereby KFC. But for that to happen, Kulim and JCorp will first have to agree to sell to a third party. They are not interested to do so.

Nonetheless, even if that route was pursued by say the Malay Chamber, there is no cheaper way. It will still cost the Malay Chamber and its partners the whole amount, as acquiring Kulim’s stake in QSR will trigger a mandatory general offer for the remaining shares held in QSR. It will also trigger a general offer on KFC shares as well. Essentially, the end effect is that you will have to acquire 100 per cent of both entities. So, certainly the RM1 billion or so proposed will not be sufficient. — Bernama


They propose to take KFC private and JCorp is to raise the fund for it, on top the existing debt of RM 3.6 billion which also been proposed to be reviewed and re-negotiated with the financial institutions.

More people are questioning MB Johor-led JCorp stewardship and the direction that the group is going. The latest is immediate ex-CEO Tan Sri Muhamad Ali Hashim.



I refer to JCorp’s plans on acquisition of KFC and QSR announced by Johor Menteri  Besar, Datuk Abdul Ghani Othman as published by Business Times, 5 January, 2012 and wish to express my concern regarding several aspects of JCorp’s expressed intentions.

To me the more relevant issue that is of concern is the shift in strategic direction that is taking place at JCorp and its group of companies that will have serious implications on its institutional role in Malaysia’s future economic development.  By extension, what is happening at JCorp as a GLC will also have a bearing on the way all GLCs are regarded and treated by their respective principals, and it underlines the urgent need to redefine in clear terms the boundaries connecting GLCs and their principals, namely the State or Federal government.

As the JCorp Group is a sizable, multi-billion ringgit corporate entity involving more than 65,000 employees and 280 companies, and with asset value exceeding RM14 billion, it goes without saying that Malaysians as a whole have a lot of stake and interest in its future sustainability and success.  JCorp’s RM3.6 billion borrowings notwithstanding (that can, anyhow, be managed and is not a major issue in terms of repayment prospects in so far as the existing lenders are concerned), the more important challenge is for JCorp to enhance its capacity for long term value creation for the Malaysian economy.  JCorp must also continuously enhance its organisational capability to multiply the opportunities available for young Malaysians to release entrepreneurial energies and express their managerial talent.

These have been the focus at JCorp in its first four decades, despite its biggest handicap compared with other corporate enterprises – namely the fact that it was a corporate entity launched by a state government without a single sen of capital paid up!  JCorp has always been the victim of having to find answers to the wrong questions posed by others  For example, on the so-called “debt burden”, the key question that should be put before JCorp is not “How and why JCorp got into a position of huge debt and owed RM3.6 billion”.  The real question should be: “How was JCorp able to build a RM14 billion corporate organisation and create vast business and entrepreneurial opportunities for young Malaysians without the government having to spend anything in terms of initial risk capital?”

This brings us to the most important right question that should be asked next by all Malaysians, which is: “With such outstanding proven track record, how can the current JCorp management team be encouraged and spurred to do more for the nation’s long term benefit?”

Unfortunately what JCorp appears to be doing will have exactly the opposite effect.    It is my considered opinion that the  hurried patching together of a restructuring and asset shuffling scheme, however much it generates in terms of quick revenues, (the bulk of which will go to others in the form of quick capital gains and fat consultant fees anyway) is indeed self-defeating for JCorp.  Because KFC and QSR are JCorp’s “crown jewels”, and any restructuring for purposes of funding and loan repayment should focus on other less strategic assets and businesses, including foreign ones that are exposed to greater risks in the context of the current volatility and  worsening of the global economic situation.

However it may appear that JCorp will immediately gain in terms of direct “control” over KFC and QSR, in my view, the scheme, including the aspect of taking the companies private, is a distorted and wrong response to the challenges faced by JCorp.  Because to my mind, other than worsening JCorp’s debt burden, this scheme will result in greater long term harm than benefit, not only for JCorp, but also for all Malaysians, especially for our young generation hungry for business and entrepreneurial opportunities.

My greatest concern is that fancy schemes such as this, apparently “flown” in by “Supermen”, will diminish JCorp’s existing robust corporate integrity. Such “externally forced” moves, albeit formally stamped by all Boards involved, will undermine internal management authority at JCorp as well as dysfunctionalise intricate management systems and professional corporate values that have been the very hallmarks of JCorp’s excellent track record and enviable business performance over decades past.  JCorp’s corporate culture, structure, decision-making systems and managerial practices honed over decades of hands-on business experience, tested and fully exposed to market forces have been the keys to its excellent past performance.  With the forced introduction of this scheme all these are under threat.

I for one would be the first to admit that however effective they had been, changes in external environment and new challenges all call for adjustments, adaptation, fine-tuning and even renewal of many aspects of past management practices.  But to turn them on their heads, to say the least, is dumbfounding.  As Americans are fond of saying: “If it ain’t broke, don’t fix it!”  But the manner it is being done at JCorp today, and through a scheme that appears to be forced upon JCorp from without, is surely a retrogressive attempt that is detrimental to JCorp’s future, irrespective of the fact that the initiative appears to be taken by the Chairman of the JCorp Board himself.

In fact, it is precisely the Chairman’s direct intervention that should be of concern!  In the context of good corporate practice and today’s high governance standards, should a non-executive Chairman be allowed to micro-manage business affairs and directly intervene in making strategic business and corporate decisions, either directly or through proxies?

Obviously, direct intervention can easily happen especially in a family-owned or government-driven business setting.  In the context of the latter it is for this reason that the expression that “Governments have no business to be in business!” has become so popular today.  It is aimed at preventing a situation where political exigencies drive business decisions that ultimately only serve narrow political interests, however they are sometimes aligned with business interests.  There are already too many examples in Malaysia of politically contrived and politically-driven businesses that have been costly for all Malaysians, often shamelessly compromising on political ethics and public moral standards as well!

To my mind, other than many aspects of the scheme raising more questions than answers, it was Abdul Ghani’s other ominous remarks that alarmed me most.  I am particularly concerned when he emphatically stated that: “JCorp is a state-owned entity and the Johor state government is DRIVING the overall rationalisation program (including this transaction) to ensure the long term sustainability of JCorp.”

During my tenure as CEO, my colleagues and I have always respected and honoured JCorp’s status as a state political creature, hence devoting JCorp’s energies and resources totally towards maximising public interests and safeguarding state and national long term benefits.  Nevertheless, quite often we had to stand up and oppose politically-designed proposals if they threaten professional managerial autonomy and were detrimental to JCorp’s sustainable future.  It would include, for example, decisions that would put JCorp in a situation forcing it to compromise on commercial principles, and in particular proposals to arbitrarily privatise assets and businesses.
It appears that JCorp is faced with similar extreme challenges today.  What is the ultimate preferred outcome here? Why are public listed companies such as QSR, KFC, and previously Sindora Bhd being taken private, hence away from open accountability and public scrutiny?  Is the end-game the wholesale privatization of JCorp?  If so, then it must be done in a fully transparent and professional corporate manner, fair to all, especially to the executives, staff and the rakyat!    If privatization is not the ultimate objective, then GLCs like JCorp should be given the autonomy to fully function by market rules and be judged by the market, with no political or government intervention. The State government cannot simply “drive” JCorp towards sustainable corporate success because it contradicts basic business and governing principles. We cannot have it both ways!

In my long career helming JCorp as CEO, I have often been asked this question: How was it possible for JCorp to perform so well and become the RM billion corporate entity that it was, compared with so many other state-owned entities including other SEDCs and Johor’s own other entities, for example, Johor State Islamic Development Corporation (JSIDC) and Kumpulan Prasarana Rakyat Johor (KPRJ)?  What was it that JCorp did differently, enabling it to excel compared with others that were less successful?

My answer had always been consistent, and it revolved around the issue of JCorp having full, responsible and accountable management autonomy.  This was translated into four decades of management practice at JCorp that enabled the top management team to take upon itself the full responsibility of ensuring that corporate growth and self-sustainability were achieved through highly professional business methods and market discipline. Thus, JCorp’s  interface with state authorities had often involved the management team having to stand up and say “No!” to many politicians.  This implied JCorp having to often “swim against the tide”, though at all times it sought to deliver value to society and fulfill broad government policy objectives.  It also attempted to do all these in a highly transparent manner, opening itself to full public scrutiny – hence the preference for the deliberate placing of all its strategic businesses under public listed companies (PLCs).

Among the so many incidences of JCorp having to swim against the tide, perhaps the most relevant example to the issue at hand is the one that had involved the acquisition of KFC and QSR, both companies valued today for their potential to JCorp.  Abdul Ghani himself had recognized this potential when he described his KFC scheme as contributing to JCorp  “… to be a profitable SEDC, enabling it to play a significant socio-economic role in the state for the benefit of the rakyat.”    Ironically, it was also Abdul Ghani as Chairman of JCorp, who had once verbally instructed me as the then CEO in late 2006, to “reverse all transactions” and “resell” the KFC shares, at the point when JCorp, through Kulim, was aggressively buying the shares in the market.  He had given these instructions and had privately opposed JCorp’s moves to acquire control of KFC and QSR for reasons best known to himself.
The point is, had I, as CEO OF JCorp, swam with the tide and simply went along with all the directives and instructions received from all my political bosses along the way, (and I had the privilege of serving four of Johor’s Menteris Besar), JCorp would have been no different from other SEDCs, JSIDC and KPRJ.  Strategic assets and businesses would all have been long privatised and there would surely be no KFC or QSR owned by JCorp today.  Perhaps there would not even be the JCorp as we know it today.

It is evident that the things that are happening at JCorp, including the latest KFC-QSR scheme, are deliberately aimed at reversing JCorp’s corporate clock and getting the “political government” to exercise full power over the corporate affairs of JCorp.  Given that in our “scheme of things” political “masters” will always ultimately have their way, it is unfortunate and indeed tragic and uncalled for if we are to simply allow JCorp to be diminished and the interests of future generations of Malaysians to be squandered for some immediate, short term benefit, however compelling it may be in the eyes of those who hold positions of power.

Tan Sri Muhammad Ali Hashim,
Kuala Lumpur,
Tuesday, 10th January, 2012.

Published in: on January 10, 2012 at 12:00  Comments (18)