FGV said it needs more land bank and planted hectareage with a younger age-profile, and has been looking outside Malaysia for some time to boost its portfolio, including Africa, Myanmar and Indonesia.
"The Eagle High Plantation land bank presents the largest contiguous land bank, from a single vendor that is also an unparalleled strategic fit," Malaysia's largest listed plantation company said in a statement today.
"In the final analysis – this is a purely commercial transaction, which will result in the making of an Asean palm oil giant, a global game-changer with clear benefits for both countries and companies".
The Edge Review reported last week that FGV's purchase of EHP had been panned by portfolio investors and bankers, arguing that the deal was hugely expensive for the company and smacked of a bailout for Sondakh, who has close ties to Prime Minister Datuk Seri Najib Razak.
Under the transaction, FGV is proposing to pay US$679 million for a 37% stake in EHP, which investment analysts had said was too high a price tag.
The report was also carried by The Malaysian Insider.
However, FGV said today the 37% stake will result in the company becoming the single largest shareholder in EHP with representation on the board.
"We are pleased to have the local parties to continue to run the company with our input, as there is continuity and great expertise in the local team. To suggest otherwise is a folly," it said.
In emphasising the deposit paid is interest-bearing and fully-refundable pending the results of the due diligence and final decision of the board, FGV said the quantum of the deposit is merely a gesture of our firm commitment to the transaction and in return for exclusivity during the negotiation period.
"It is mischievous to suggest anything else," it added.
The company also said FGV was not looking for majority control as it would trigger a MTO (mandatory takeover) that would not be viable.
FGV said the proposed implied EV (equity value)/ha for the planted hectarage of EHP was approximately US$17,400 per hectare – lower than the recent transactions involving Sime and NBPOL (EV/hectare of US$25,900) and Unico Plantations (EV/hectare of US$23,500).
Compared with recent Indonesian transactions, the hectarage involved was small in nature, of less than 70,000 hectares.
"Further, the valuations quoted by the writer for domestic Indonesian plantations does not make reference to the location, size and age profile of the land bank," it said.
The company said crude palm oil prices were now at a historic low, which had impacted its revenues, adding that its income was made up of 70% palm oil commodity trading and 30% downstream ventures.
As such, there was a critical need for deliberate acceleration of its strategic transformation plan to move towards rebalancing its revenue streams to 60% palm oil trading and 40% downstream business.
"We must be prepared to take advantage of that with lower cost of production, higher volumes, better efficiencies and margin and strategic positioning to leverage the downstream business," it said.
FGV said the current average age profile of its planted hectarage was 15.5 years, putting it at the matured and ageing end of the spectrum.
Additionally, out of the 450,000 hectares under FGV’s management, 355,864 were subject to the Land Lease Agreement (LLA) with Felda, pushing up its operating costs.
"In a depressed market and current low share price that does not reflect the intrinsic value of the company, the management is focused on the medium- to long-term view, putting into place our three-pronged strategy of revenue enhancement, cost optimisation and operational excellence to boost revenues and margins, which will result in higher shareholder value.
"Again to imply that we are paying a premium to the current share price is simplistic and exhibits a clear lack of understanding by the writer on deal valuations.
"To buy from the open market, you need a large enough block available, and even so, prices will be pushed up if we try to acquire what is available. More importantly, it discounts the unparalleled strategic fit for FGV and Malaysia in obtaining access to the Indonesian downstream market, sugar market, fertiliser market and 240 million consumer market that this partnership with the third largest Indonesian conglomerate offers.
"Indonesia is ‘serumpun’ and we are happy to have a known quantity as a partner, the third largest diversified conglomerate in Indonesia, which has also exhibited trust in FGV by agreeing to a 2.55% stake in the enlarged share capital of FGV once the transaction is completed," it said.
FGV added that it was puzzled over the Edge Review report on the matter as the company had yet to make an announcement on the financing mechanism. It is currently discussing the funding structure with its investment bankers to get the best deal possible for its shareholders.
"It is also important to note that should we go for an all debt structure, our gearing will only go to 1:1, which is very reasonable for a high-growth palm oil plantation company."FGV wants to reiterate that its dividend policy will remain unchanged and will be an important consideration in the structure of the funding," it said.