* Biggest divestment so far for Khazanah
* Deal is for cash at 5.50 ringgit per Proton share
* Analysts keen to see if Lotus will be sold off
By Niluksi Koswanage
KUALA LUMPUR, Jan 16 (Reuters) - Malaysia's state investment arm Khazanah is selling its 42.7 percent stake in domestic carmaker Proton to conglomerate DRB-Hicom for $411.9 million, part of the government's strategy to boost liquidity in the local stock market and monetise assets.
The offer to Khazanah -- its largest divestment of government-linked firms so far -- was made at 5.50 ringgit per Proton share, representing a 6.2 percent premium to Proton's last closing share price.
The investment firm said in a statement on Monday the deal was facilitated by "an acceptable offer price" from autos-to-property conglomerate DRB-Hicom, owned by Malaysian tycoon Syed Mokhtar Al-Bukhary.
The cash deal, once completed, will trigger a mandatory general offer for the remaining Proton shares at 5.50 ringgit per share, DRB-Hicom and Proton told the stock exchange.
"The divestment is a further example of public-private partnerships...whereby strategic divestments are made with the aim of putting government-linked companies on a stronger and more competitive footing," Khazanah's managing director, Azman Mokhtar, said in an emailed statement.
"At the same time (it enhances)...private sector participation and building the entrepreneurial capacity of Malaysian businesses in key economic sectors," he added.
Trading in shares of both Proton and DRB-Hicom was halted on Monday morning due to the deal's announcement. Trading will resume on Tuesday.
MAHATHIR'S BRAINCHILD
With their Islamic star-and-crescent badges, Proton cars became one of the symbols of industrialisation in this mostly Muslim Southeast Asian country in the 1980s that was emerging from the rural backwaters.
Former Prime Minister Mahathir Mohamad came up with the idea of a national car to develop the country's automobile sector and corner pent-up domestic demand while imposing prohibitive import taxes on foreign-made cars.
But Proton has struggled to grow its share in an increasingly competitive domestic market dominated by another national car and a gradual scaling back in import tariffs.
Since the 1990s, Proton has unsuccessfully sought to tie up with a global carmaker to boost sales.
It bought British sportscar manufacturer Lotus after owner Romano Artioli went bankrupt to bump up its engineering capabilities and ride on a global brand name, a move analysts now say was unwise.
"Right now Lotus is loss-making. Whoever buys in still needs to pump in money to revive Lotus or they'll have to dispose of it," said Kaladher Govindan, head of research for TA Investment Bank. "The broader issue remains whether DRB-Hicom can make it competitive or not, whether Proton can compete with other global brands," he added.
MANY OFFERS
DRB-Hicom's offer potentially closes the chapter on the government's years-long search for a strategic partner to transform Proton, which is likely to post a second consecutive year of declining profits.
The government had been in discussions for Proton to form a partnership with foreign carmakers, including Volkswagen and General Motors Co.
But the talks fell through in part due to pressure from Mahathir, who as Proton adviser said the national car company must remain in Malaysian hands.
The former premier was quoted as saying last month that Khazanah would sell to DRB-Hicom, endorsing a bid by Syed Mokhtar, a former cattle breeder who made his fortune during Mahathir's administration in the 1980s and 1990s.
Proton is the largest corporate deal in Khazanah's divestment campaign, which started more than a year ago when it sold a 32.2 percent stake in national postal company, Pos Malaysia, to DRB-Hicom for more than 600 million ringgit.
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