Will Tan Sell Shares To Buy Expansion?

Berjaya wants to expand its gaming interests around the region but will governmental and legal restrictions be as much of an issue abroad as in Malaysia?

Launching on the stock market is one of those things that can either make, or indeed break, a going concern. The sharing of risk comes at the cost of sharing confidence, and that can be a tricky thing to manage especially in volatile or variable markets. The hand of the free-market can be both generously giving and distinctly harsh in its rebuke, so careful consideration has to be given to both the financial repercussions and the knock-on effects that can result in a less than well thought-out IPO.

Vincent Tan Considers IPO

• Environmental services division may be floated
• Malaysian gambling laws restrictive
• Japan and South Korea eyed as future prospects

Perhaps this then is why Berjaya Corp is being almost hesitant with its decision to sell shares in its environmental services division, a move that it is hoped will provide capital for a range of expansion and diversification exercises that are aimed at driving forward growth across the group that has faced a steady, if somewhat haphazard, fall in its overall share price since the start of the year. Perhaps this slide, now reaching some 18% over 2014 thus far, has stoked the reticence but it does leave the only way ahead upwards.

The environmental services division has a remarkably diverse range of holdings with landfill sites in both Malaysia and China already staking them out as a large scale service provider within the sector that has led to them being bestowed with a concession to develop and operate a wastewater treatment plan in the economic powerhouse of Guangdong province, sitting on the southeastern coast of the mainland just where the two Special Administrative Regions of Macau and Hong Kong connect with China proper.

The growing demand for facilities of this sort is not, of course, limited to just China as expanding economies across the region produce more and more waste that needs to be effectively and profitably managed, all with a modicum of environmental awareness, something Berjaya has a proven track record of achieving. The floating of this division of their company therefore has a lot of investors interested, but will it be enough to turn around what has been a ghastly year for the corporation?

Initial Public Offering In The Offing

Founder, chairman and chief executive of Berjaya, Vincent Tan, has long steered the corporation into a diverse range of interests, investments and ownerships. From the Berjaya University College of Hospitality to their being a distributor of Mazda passenger vehicles, they have a huge stake in the Malaysian markets in various sectors, and further afield have sizable holdings in the Cosway Corporation that does so much in the consumer products arena in Hong Kong and elsewhere.

This diversity has led some industry watchers to wonder if the billionaire, estimated by Forbes to be worth somewhere in the region of $1.6 billion, has spread the corporation thin, making the proposed IPO a way of consolidating individual divisions within the group. This particularly applies to the gaming sector where the need to expand beyond the traditional home market is pushed forward by an intransigent government.

The only casino license granted to a resort in Malaysia went to Genting Malaysia whose “Highlands” resort is one of the most popular destinations in the country, just an hour outside Kuala Lumpur, or a short cable car ride away. Repeated attempts to break this monopoly by Tan have produced no fruit so far, with even his well known ties to major political figures in the country not evolving into a second license being forthcoming.

Whilst the lottery business, part of the group since 1985, keeps the gaming sector front and centre, it is one upon which Mr. Tan seems intend on building. The illegality of online gambling sites in Malaysia, and singular nature of casinos in the country (Genting's Highlands is the only place one can, for instance, play table games in Malaysia) means that in order to expand the gaming sector Berjaya and Mr. Tan will have to look abroad and already has his eyes on several possibilities.

Expansion Abroad The Only Way Ahead

The desire to develop gaming interests in the Malaysian market may seem like merely a matter of time and influence, but in some of the other projects the group has in its sights, a fair degree of luck and political good will is going to be required for them to even get off the ground. For example whilst South Korea has legalized casino gambling, that legalization doesn't really extend to the local population (the mainstay trade of most casinos), so a will to move into the market may not be enough to make it profitable.

Most casinos cater to only foreigners in South Korea, just one is open to locals at all, and even then not to gamble. South Korean citizens aren't even allowed to gamble abroad with an “Habitual Foreign Gambler” law holding a three year prison sentence over the heads of anyone who does, despite there being very little way to enforce it. Even the most powerful of partners, being sought even now by Berjaya may not provide a rapid change to the laws that keep locals out of the loop.

“Casinos are no longer a very lucrative business unless you go to some big countries. Lots of casinos still focus on highrollers but the mass market is still very big” said Tan, indicating that laws preventing locals gambling are perhaps best consigned to the past. However given South Korea is as harsh on the internet's gaming facilities as authorities are on internet betting in Malaysia, some have termed it another pipe dream under current political circumstances.

The other target for expansion abroad is one many gaming entities wish to exploit; Japan. With governmental mutterings about changing their strict anti-gambling laws Tan is not alone in making optimistic preparations for legalization somewhere down the line, purchasing 100 acres of land in Okinawa that could be used for a resort should Japan decide to become what would instantly be the second largest gambling market in Asia. Only time will tell if the IPO and the zeitgeist around the region facilitate Berjaya's desires or doom them.