By Xavier Kong
Of the deals FGV has done since it listed in 2012, the deal to acquire Eagle High Plantations takes the cake. KINIBIZ takes a look at the deal itself, as well as the controversy that surrounds the questionable acquisition.
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Felda Global Ventures Holdings Bhd (FGV) has been mired in questionable dealings ever since it listed on the Main Market of Bursa Malaysia, not so-far back on June 28, 2012. But this latest deal with Indonesia-based PT Rajawali Capital International for the acquisition of a company called PT Eagle High Plantations Tbk (EHP) just seems to take the cake.
The deal involves FGV paying, through a mix of cash and FGV shares, a total of US$680 million (RM2.55 billion) for a 37% stake in a company that FGV currently values at such a premium that it is almost ludicrous. The owner of EHP, Rajawali, also requires a deposit from FGV should the deal go through.
Sounds like a bad deal? Investors seem to think so.
FGV’s share price has seen a fall of 21 sen from June 11, 2015’s share price of RM1.86, when FGV had requested a trading suspension, to RM1.65 on June 15, 2015. In just two days of trading (Friday, June 12 and Monday, June 15), FGV’s share price fell 11%.
Not to say that FGV’s share price has been doing very well since it listed on Bursa Malaysia, but that’s another story. But here’s a chart of FGV’s share price performance since it listed to the current date, as the picture here does speak a thousand words.
Bereft of justification
Consider this. The offer price from FGV equates to a valuation of about 770 rupiah per share, which is a premium of 71% over the closing price of EHP on June 12, 2015 at 450 rupiah.
Furthermore, just about five weeks prior to the offer date, EHP had seen an intra-year low of 245 rupiah. This would make the offer price a 214% premium to the valuation of EHP used as a measurement for the deal.
Yes, read that again, a premium of 214%.
It should be further noted that Rajawali had only acquired EHP in September 2014, through a reverse takeover exercise that saw a rights issue by EHP, which offered six rights to the one share.
The proceeds of the rights issue, some 10.8 trillion rupiah (RM3 billion), were then utilised to acquire Green Eagle Holdings, an entity controlled by Rajawali. With that, EHP, previously known as PT BW Plantation Tbk, came under the control of Rajawali, and post-consolidation, would have a market capitalisation of between 15 trillion rupiah and 16.3 trillion rupiah.
So, the question here becomes one of why. To be more precise, it is a question of why Rajawali would be willing to let go of 56.4% of its own shares in EHP to FGV? (Rajawali has a stake of 65.5% in EHP, of which 37% is being sold to FGV, leaving Rajawali with a 28.5% stake in EHP, or 56.4% less what it had to begin with).
A likely explanation would be that of the huge premium attached to the offer price, as well as the payment plan agreed upon by FGV and Rajawali. The payment plan, which would involve both cash as well as FGV shares, would see FGV paying a total of US$632 million directly to Rajawali in cash, with the remainder to be paid up with shares in FGV.
Ladies and gentlemen, this means that FGV, in its current loss-making state due to floods affecting its crop, as well as being affected by the low crude palm oil prices recently, will be further shelling out RM2.36 billion directly to Rajawali.
In addition to that, the remainder RM180 million will be paid in the form of FGV shares. This would see Rajawali in control of about 95.4 million new FGV shares, according to the announcement on Bursa Malaysia on June 12, 2015.
To be precise, the section in question stated that the share exchange portion would involve “95,441,601 new shares in (or such other amount of shares representing 2.55% of the enlarged issued capital of) FGV in exchange for 2,206,770,370 of Eagle High sale shares, where such number of new shares in FGV is calculated based on the exchange ratio of 0.0432494481”.
This strikes KINIBIZ as a rather dangerous thing to be doing, considering a particular argument by Credit Suisse in a report, which brought attention to the point that Rajawali could very well destabilise the price of FGV shares further than the turmoil it has seen recently, due to Rajawali selling those shares on the open market.
As such, Credit Suisse had, in their report, also noted that this deal would be too expensive for FGV. This entire deal would also see FGV’s net debt rise to RM6.6 billion, from a previous RM1.7 billion.
A deposit?
Yes, that’s right, there is a deposit involved as well! According to the announcement on Bursa Malaysia, FGV and Rajawali have entered a deposit payment agreement, where FGV would, upon the conditional sale and purchase agreement becoming unconditional, pay US$174.5 million, or about RM653.6 million, as a deposit to Rajawali.
Of course, this also acts as a deposit for the lesser-mentioned but still applicable acquisitions of 95%, 95%, and 93.3% respectively of PT Cendrawasih Jaya Mandiri, PT Karya Bumi Papua, and PT Rizki Kemilau Berjaya, which has a total consideration of US$66.5 million, about RM249.1 million. This sale comes under a separate conditional sale and purchase agreement, but is also tied to the EHP acquisition.
So, if KINIBIZ has it down right, this means that FGV has to pay a 23% deposit upfront. Twenty-three percent, more than a quarter of the total consideration of both the deals, which come to a total of US$746.5 million (about RM2.79 billion).
The question that comes to mind here is this: why is there such a huge deposit required for the deal?
No control
What would stand out as the most significant flaw in this acquisition by FGV, at least in the eyes of KINIBIZ, is the point that, despite becoming the largest shareholder in EHP with the acquisition of the 37% stake, FGV does not have management control over EHP.
Yes, that is one of the conditions that had been set by Rajawali as part of the deal. Despite FGV becoming the largest stakeholder in the firm, the power to make decisions still stays with Rajawali.
This is worrying on several levels at the same time. First, and most directly visible, is that FGV would have no control over the direction of EHP, which would place FGV in the position of first-class passenger, rather than the more important role of the pilot.
This, in turn, brings a further question to the high premium that FGV has proposed for the acquisition. As it was made known to KINIBIZ, in the plantations game, the premium is paid not only for the quality of the asset, but also for the controlling factor.
At the same time, why would FGV buy into the company, and not the land directly? Yes, FGV is buying into the company, and this in turn leads KINIBIZ to questions about the direction FGV is taking.
FGV is not an investment holding company, and as such, should not be taking a non-controlling stake in a plantation company.
Why is FGV not moving on to the land itself, and doing their own planting, or buying the planted land and doing the harvesting? Either way would have FGV boosting its production, and at the same time, its revenue and hopefully profit margins.
On the other hand, if FGV wants to become an investment holding company, then why pay such a high premium for a non-controlling stake? FGV could just acquire shares through the open market over time, which would almost certainly be less costly.
In the next article, we will take a closer look at the reactions to the deal, the questionable RM140 per share deal previously made by FGV, as well as the Sondakh Connection.
Tomorrow: The reactions and the fallout
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