1MDB Financial Engineering Demystified (2)

Our simplified explanation of how parties could have profited from 1MDB deals. This is meant as an example or illustration only.

2. Acquisition of IPPs
1MDB acquired the equity in 3 IPPs for RM12.07 billion. Roughly 3 years later, these were sold to CGN, a Chinese company for RM9.83 billion. Did 1MDB overpay for the IPPs?

The equity valuation of an IPP is based on the cash flow it can give its shareholders after paying off other claimants to its cash, namely operations, capital expenditure and lenders. Unlike other businesses, an IPP’s cash flow is easy to forecast due to the Power Purchase Agreement (PPA) terms. Hence, equity valuation can be done easily. So how much cash could the shareholders get?

2 of the IPPs were nearing the end of their Concession. Without the PPA extension, their value would be very low. Even if extended, the new tariff would be much lower as the IPPs’ debts had been paid off and they were in a relatively weak bargaining position. Based on the value, it seems that a lot of cash was assumed to be generated for shareholders.

Lastly, valuation using DCF is very dependent on the discount rate used. This is the easiest place to play with valuations. Was the discount rate used fair?