A Kuala Lumpur billboard pitches state investment fund 1MDB, which has amassed more than $11 billion in debt and is the subject of four government investigations. PHOTO: REUTERS
Debt-laden state investment fund 1Malaysia Development Bhd. defended the price it paid for a power company in 2012, saying it had received “independent valuation” advice during the transaction.
A person familiar with the transaction said the valuation was done by Goldman Sachs Group Inc., which advised the fund on the deal and therefore wasn't considered independent because it would benefit financially if the transaction was completed.
The 1MDB fund was formed by Prime Minister Najib Razak in 2009 to help develop Malaysia’s economy. It also indirectly supported his party’s re-election campaign two years ago. The fund has amassed more than $11 billion in debt that it now struggles to repay and is the subject of four government investigations.
The Wall Street Journal last week reported the fund paid what appeared to be an inflated price for a power plant owned by Malaysian conglomerate Genting Group. The conglomerate subsequently contributed to a Najib-led charity that announced projects that Mr. Najib was able to tout as he campaigned.
The statement about the independent valuation on its power-plant purchase came in response to The Wall Street Journal article. “We only acquire assets when we are convinced that they represent long-term value, and to suggest that any of our acquisitions were driven by political considerations is simply false,” 1MDB said in the statement, which was released on Tuesday and expanded on its comments in the original article.
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In the statement, 1MDB defended the 2.3 billion Malaysian ringgit (about $740 million at the time) it paid for the Genting unit. The fund said the price was based on “advice received from independent valuation advisers.”
The person familiar with the matter said Goldman Sachs, which was 1MDB’s financial adviser on the purchase, was also the only party to conduct a valuation of the power unit on behalf of 1MDB. Goldman had a long relationship with 1MDB, underwriting bonds and advising it on other transactions.
To help them assess the value of assets in a deal or justify the deal to investors, lenders or regulators, companies often seek independent valuations from investment banks, accounting firms or consultants that aren't involved in it. A firm advising on the deal could benefit financially if the transaction is completed, potentially creating a conflict of interest.
A 1MDB spokesman said its adviser’s opinion wasn’t biased, adding: “Any valuation produced by 1MDB’s financial adviser is by definition independent as it is independently produced by that third party for 1MDB’s consideration.”
The spokesman said 1MDB had appointed a number of third-party advisers including lawyers and accountants to look into different areas of the purchase, such as the power assets’ technical specifications. All of these parties contributed to the valuation, according to the spokesman.
The 1MDB spokesman declined to make any valuation available. “It is not a policy of 1MDB to share such information,” the spokesman said.
The 1MDB fund acquired the Genting unit—which owned a 75% stake in a 720-megawatt coal-fired power plant near Kuala Lumpur—in October 2012. Genting later reported a 1.9 billion-ringgit extraordinary gain on this sale, implying a value for its stake of just 400 million ringgit, or less than one-fifth what 1MDB paid for it.
Malaysian Prime Minister Najib Razak founded 1MDB in 2009 to help develop Malaysia’s economy, but it is now roiling markets and leading to calls for his ouster. PHOTO: ASSOCIATED PRESS
In a second sign that 1MDB paid a high price, the fund’s financial statement for the fiscal year ended in March 2013 said the power unit’s property, plant and equipment were worth a little under 500 million ringgit at the time of acquisition.
The fund cited 1.7 billion ringgit in “intangible assets”—that is, the plant’s agreement to sell power to a state-owned entity. But this valuation appeared to be contingent on Genting’s obtaining a renewal of its power-sale agreement, which would run out in 2016.
Genting announced the terms of the sale to 1MDB in August 2012. Equity analysts at the time called the price positive for Genting, given that its contract to sell power was set to end within a few years. In early October, Malaysia’s Energy Commission, an independent body that regulates the energy sector, announced Genting had won a 10-year extension, giving it the right to sell power through 2026. A few days later, Genting and 1MDB completed the sale.
Soon after the purchase, 1MDB appeared to recognize that it had overpaid for the power assets. In its financial accounts for fiscal 2013, the fund took an “impairment” charge of 1.2 billion ringgit, writing down part of the premium it had paid for power assets from Genting and another Malaysian company.
A few months after the sale, a unit of Genting called Genting Plantations Bhd. donated about $10 million to a Najib-linked charity, according to a spokesman for Genting Plantations. The charity, Yayasan Rakyat 1Malaysia, lists Mr. Najib as chairman on its website.
Though set up to help underprivileged Malaysians through education and sport, this charity soon got involved in spending that appeared designed to help Mr. Najib retain power in a May 2013 election. It and other charities linked to the government spent millions of dollars before the voting in Penang, a northern state that was an important election battleground. Mr. Najib visited Penang during the campaign and announced that Yayasan Rakyat 1Malaysia would donate two million ringgit (about $660,000 at the time) to two local schools. These schools serve Chinese communities that aren't a poor demographic, but whose support would be crucial to win voting in the area.
Write to Tom Wright at tom.wright@wsj.com
