Thailand’s richest man is rediscovering the joy of debt. Fresh from leveraging up to buy a stake in the Ping An Insurance Group of China, Dhanin Chearavanont is borrowing $6 billion to finance a takeover of Siam Makro, a cash-and-carry company. Combining that group with his 7-Eleven convenience store chain makes sense - as long as Southeast Asia’s financial boom keeps the cash flowing.
For Mr. Dhanin, the deal is a poignant return. He co-founded Siam Makro with the Dutch group SHV Holdings in the late 1980s, but was forced to sell in 1998 when the Asian crisis left his empire overextended. Emotion aside, the combined business should also be in a stronger position to expand into neighboring Southeast Asian countries like Laos and Myanmar.
The reunion does not come cheap. The offer price of 787 baht a share is 75 percent above where Siam Makro was trading in early January, and values the business at a whopping 53 times last year’s earnings. The advantage is that both Siam Makro and CP All, Mr. Dhanin’s partially listed Thai retail company, currently have no debt.
Deduct the net cash sitting on the two companies’ balance sheets at the end of last year, and Mr. Dhanin needs to borrow about $5.6 billion. Assuming financing costs of 6 percent, the annual interest bill will be roughly half the combined operating profit of the two businesses last year.
But that is before factoring in cost savings and increased purchasing clout when negotiating with food producers. Add in continued growth - Siam Makro’s earnings have doubled in the last two years - as well as the cash-generative nature of the retail business, and debt should soon fall.
The risks are more macroeconomic and political than financial. Thailand’s economy is booming, partly because of overgenerous government subsidies and hot-money flows that are pushing up consumer debt. The possible return from exile of Thaksin Shinawatra, a former Prime Minister, could also reignite political tensions. And Mr. Dhanin’s large Chinese operations are vulnerable to an economic slowdown. The Asian crisis will undoubtedly have taught Mr. Dhanin some financial lessons. He must hope that his timing has also improved.
Peter Thal Larsen is Asia editor at Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.
