Worst deal of the year

By KINIBIZ

Petronas’ failure to privatise shipper MISC must rate as the worst as a less than fair offer resulted in some institutions ganging together to thwart the offer. If the national oil corporation had been a bit more generous, the cat would have been in the bag.

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Petronas fails to privatise MISC

Petronas’ (Petroliam Nasional) bungled attempt to privatise MISC (Malaysian International Shipping Company) was a victory of sorts for the little guys. The state oil company was in a deadlock with minority shareholders for over two months to seal the deal. The bone of contention was Petronas’ low valuation of MISC, Malaysia’s leading shipping company.

The state oil company offered to purchase all remaining shares in MISC at RM5.50 per share to delist the shipping giant from the Bursa, ostensibly to have  “greater flexibility in deciding MISC’s strategic direction”. Petronas’ initial offer was RM5.30 per share but upped the ante after minority shareholders baulked and demanded a higher price. It owned 62.67% of MISC and required a 90% acceptance of outstanding shares that it did not own to take it private.

Petronas’ revised offer was still far below most analysts’ market valuation. Many had pegged MISC’s fair value at RM6 to RM6.50, with some even rating it as high as RM8.00 per share based on future prospects. MISC operates the world’s second largest fleet of LNG (Liquefied Natural Gas) tankers and has a market capitalisation of over RM20 billion.

A lot seemed to rest on MISC’s two largest minority shareholders EPF (Employees Provident Funds) and PNB (Permodalan Nasional Berhad) with 9.5% and 6.3% respectively. If either or both had refused to budge on Petronas’ offer, the deal would have been a non-starter. Instead, it went down to the wire.

The stalemate seemed to have been broken when EPF accepted Petronas’ final offer a week before the deadline. PNB was expected to follow suit but apparently did not. Other smaller minority shareholders held their ground and narrowly prevailed when the oil giant could only muster a final 86.07% stake. At the end of the failed bid, Petronas returned to its original shareholding level.

Questions lingered over EPF’s meek acceptance of MISC’s final offer. AmInvestment Bank had reported that the offer price “represented a discount of between 3.3% and 9.8% to the range of the indicative sum-of-parts valuation of RM5.69 to RM6.10 per MISC share.” As custodian of over RM500 billion in workers’ funds, it should have sought the best deal possible for its members and protected the rights of minority shareholders.

— by Khairul Khalid.

Other contenders

Felda Land Development Authority (Felda) and its subsidiaries

It has been a busy year for Felda Land Development Authority (Felda) and its subsidiaries such as Felda Global Ventures Holdings (FGVH) with the plantation company doing several interesting, if not questionable deals. In this year-end wrap up, Kinibiz looks at several key deals done by Felda and FGVH and highlights why they were contenders for worst corporate deals done in 2013.

FGVH spends some of its RM6.2 billion IPO funds

Let’s start with Felda Global Ventures Holdings (FGVH) purchase of Iris Corporation’s equity at RM110 million in early August, which raised eyebrows for both its expensive valuation and the nature of Iris Corp’s business.

Iris Corp’s core business of chip making for passports and identification cards, does not quite match FGVH’s expertise (which is supposed to be plantations, of course). Iris does have an arm that makes boilers, which in turn uses empty fruit bunches from palm oil as fuel – but the question is if it is worth the money FGVH paid for it?

The numbers would appear to say no – for its year ended March 2013 Iris posted net profits of about RM21 million, FGVH’s offer therefore translates into 21 times earnings multiples (RM110 million divided by 25% of the net earnings).

Meanwhile its environment and renewable energy arm made only RM3 odd million, meaning that basically Felda could have owned the entire unit (which is palm oil related) for less than RM16 million (applying the same 21 times valuation, which is already on the high side). Furthermore after dilutions of Iris warrants and other adjustments Felda only ends up with around 17.7% of Iris, which is not nearly enough to equity account the earnings.

Felda ventures into tourism

With a view for diversification so as not be vulnerable to ups and downs of the international crude palm oil (CPO) market, Felda purchased several hotels both locally and internationally, in London. According to Chairman Isa Samad, it is important for Felda to not be overly dependent on fluctuations of CPO market and that plantation companies with a diverse portfolio would be able to better withstand volatility.

Although these were fair points, the questionable part was the choice of sector to move into, as moving into the tourism industry might be akin to out of the fire and into the pan as the tourism sector is also known to be susceptible to both local and international headwinds.

FGVH buys remaining 51% stake of Felda Holdings

A good deal for FGVH, but a poor one for Felda Holdings and more importantly for Koperasi Permodalan Felda Malaysia (KPF) and the settlers who are its shareholders.

To recap, in October FGVH which already owned 49% made a RM2.2 billion offer to buy out the remaining 51% of Felda Holdings from Koperasi Permodalan Felda Malaysia.

The deal was subsequently accepted by KPF’s representatives at an EGM, despite the disapproval of settler advocacy groups like Anak Peneroka Felda Kebangsaan (ANAK) whose president Mazlan Aliman question the financial consequence of losing its Felda Holdings stake which he said represented 80% of KPF’s strength.

Meanwhile an opinion piece by Kinibiz highlighted the flaws in the deal and questioned the conflicts of interest between those negotiating the deal.

Questioning comments made by the director-general of the Felda Land Development Authority Faizoull Ahmad in which he said that the proceeds of the sale would be use to but 10% stake in FGVH, Kinibiz asked why KPF would even announce such a plan? Would it not have been more practical to go about purchasing this 10% without making comments that would cause FGVH’s share price to run?

Another crucial question is that post the deal with KPF owning 10% post the deal and FGV wholly owning Felda Holdings, is if the deal is fair? For this you have to look at the valuation factor.

FGVH offered RM2.2 billion for 51%, which would translate into the entire company being valued at about RM4.3 billion. However according to back-of-the-envelop calculations based on available financial data, Felda Holdings net attributable profit in 2012 was RM388 million which its net assets or shareholder equity was RM4.6 billion – and this means that just for a start the RM4.3 billion value for Felda Holdings is below its net assets of RM4.6 billion, making the acquisition value a mere 0.93 times assets.

So again in this deal, as in the others done by Felda and its subsidiaries in 2013 – the numbers simply do not add up. Throw Felda, Felda Holdings and FGVH’s convoluted ownership and management structure into the mix and it is easy to see why the above mention deals were such strong contenders for the worst corporate deals of 2013.

— by Stephanie Jacob

The Focal Aims Holdings reverse take-over

At first glance, the reverse-takeover of little-known Focal Aims Holdings by fast-emerging outfit Eco World Development Holdings Sdn Bhd seems like a great deal.

For one, it fast-tracks Eco World towards becoming a public-listed entity, which in turn would help it raise funding more easily given its fast-paced land acquisition and product launches — notably reminiscent of SP Setia.

Another plus is that the Johor-based developer has prime land banks in Johor: its Kota Masai township development in Pasir Gudang.

But the deal also raises questions on how it was executed. A glaring question is about Liew Tian Xiong acting as an offering party in the takeover offer — given that he only graduated in 2012, at 22 years old it is difficult to imagine him being in a financial position to act independently of his father, the blue chip property man Liew Kee Sin of SP Setia.

And indeed Liew senior is providing the money for his son’s buy-in, in turn raising conflict of interest issues in light of his position at the helm of SP Setia. With Eco World’s style, execution and market niche remarkably similar to SP Setia, Liew’s position in the whole story raises not a few eyebrows in terms of propriety.

In short, the deal could have done with a little more tact and subtlety. The bad taste is incredibly only topped by Permodalan Nasional Berhad (PNB) amazing silence about the whole issue.

— by Khairie Hisyam