Sunday, 6 April 2014

Maybulk: IPO of POSH (1)

Finally, after 5.5 years waiting, POSH will go for an IPO at the SGX.

I have written many times about the Related Party Transaction whereby Maybulk bought 21% of POSH in 2008, especially:

Maybulk/POSH: What happened to the Cash?
Clarkson, the valuer who didn’t believe his own valuation
Maybulk/POSH: KPMG's "independent" advice
Maybulk: before and after POSH

To recap, Maybulk bought in December 2008 34M shares in POSH at a valuation of USD 6.50 per share, for a total of USD 221M, or RM 778M. POSH was valued pre-deal at USD 780M.

My take on this deal is that the valuation of POSH was much too high, the exact reasoning behind that can be found in the above links, but in a nutshell:
  • POSH's Net Tangible Assets were minus USD 107M (in other words it had more debt than hard assets);
  • POSH's Net Assets were USD 188M (including goodwill);
  • POSH only existed a few years, with most of its purchases done a short while ago, when the economy was still booming;
  • At the moment of the RPT, the severe global recession was raging, banks cut credit lines, asset prices were falling from the sky, companies were going bankrupt.

But the deal itself was not the only worrisome element, also the low quality of the prospectus.

Fast forward four years, November 2012 Maybulk invested even more money in POSH by subscribing to a rights issue of RCPS (Redeemable Convertible Preference Shares) at USD 4.00 per share.

Fast forward to April 2014. Maybulk finally announced that POSH will go for an IPO on the SGX, estimated to be at the end of this month.

Three announcements were made to Bursa Malaysia.

The IPO of POSH was supposed to happen within five years after Maybulk's acquisition, a rather long time frame. Why could that not be achieved? No reason whatsoever was given.

In 2008, Maybulk received a put option, if POSH was not able to go for an IPO within five years then Maybulk could exercise its put option and would receive USD 8.125 back per share, 25% more than they paid for in 2008.

This option is not exactly peanuts, the amount of money involved is USD 276M or RM 914M (Maybulk would still own the POSH shares converted from the RCPS).

I had hoped that the minority shareholders of Maybulk would be allowed to vote on this important issue, after being given a clear picture of the two alternatives, exercising the option or keeping the POSH shares. That was not to be the case:

It was just the three Independent Directors who "deliberated" over an issue close to RM one Billion hard cash? Is this actually correct from a legal point of view, do independent directors yield so much power that they can solely propose how to settle issues of such magnitude? I think it should have been decided in an EGM, after all shareholders have received proper information, enabling them to make an informed decision.

It is not even mentioned when the decision not to exercise the option was taken or why the shareholders of Maybulk were not immediately informed. 

More importantly, no reason whatsoever is given for the decision, not even a single line, why?

From a Corporate Governance point of view, I find this completely unbelievable.

Also, it is not clear why the decision has been taken. At this moment it is still not yet sure at what price POSH will go for an IPO. At a high price (say USD 10 per share, clearly higher than the USD 8.125 Maybulk would receive if it exercised the option) it might indeed be wise not to exercise the option.

But at a low price (say USD 6.50 per share), why not exercise the put option and hand the money back to the shareholders of Maybulk in the form of a dividend? They can then decide for themselves where to invest the money in, they could even chose to buy POSH shares in the open market if they wish to do so.

The three Independent Directors who made the decision have been a very long time with Maybulk, one director almost 18 years, the other two more than 10 years. That is longer than the recommended maximum term of 9 years. According to the Guidelines of EPF, "their independency could be impaired by their long term participation". The EPF will vote against renewal of independent directors who are with a company for longer than nine years.

If these directors are important for Maybulk then they should be converted to non-independent directors, giving new independent directors a chance to have a fresh look at the issues at hand.

One independent director (Dato' Capt Ahmad Sufian) was actually a non-independent director of Maybulk before and is now also a director of the PPB Group, the third largest shareholder of Maybulk and also linked to the Kuok Group.

Another independent director of Maybulk (Tay Beng Chai) is MD of a law firm (Tay & Partners) that has Maybulk and Wilmar as clients, the Kuok Group even appears to be a significant client. Tay is also a Kuok Foundation scholar.

The question is, will this all have an influence on their independence? And, should the information regarding Tay be disclosed to the shareholders of Maybulk?

Maybulk is asked to pour even more money into POSH, after the first purchase in 2008 and the subsequent rights issue of RCPS. The money invested is already close to RM 1 Billion, clearly more than half of Maybulks shareholders equity which stands at roughly RM 1.7 Billion.

The reason given is that Maybulk will be able to equity account the profit of POSH.

There is nothing magically about equity accounting, it is not that if a company A owns 20.01% of company B that is actually receives 20.01% of the profit, and nothing if it owns only 19.99%. In both cases company A receives only the dividend that company B pays, pro rata to the shareholding. It is a bookkeeping manner with no impact to the actual cash flow.

Berkshire Hathaway has created enormous value for its shareholders by investing in listed companies, almost always below the 20% required for equity accounting. Buffet invented the "look-through earnings" to give a better picture of the earnings generated in a year. I can not recall any shareholder of Berkshire Hathaway ever insisting on Buffett to buy minimum holdings of 20% in listed companies so that the reported earnings look better.

[to be continued]

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