Delloyd's hidden gems to be revalued? (3)

I wrote before about Delloyd, here and here.

I hoped that the assets of Delloyd, especially the Sungai Rambai Estate and the estates in Indonesia would be revalued. That has indeed happened.

I also wrote:

"The independent adviser for this corporate exercise is Affin Investment Bank.  I would love to see them write something along the lines: "we estimate that the RNAV per share is around RM 15, therefore we find the proposed price not fair and not reasonable". Will they write that? Although independent advice has been improved significantly, I don't think that will happen."

Indeed, that has not happened.

Affin came up with a SOPV (Sum Of Parts Valuation) of RM 7.60. Since the offer price of RM 5.15 is a 32% discount to that valuation, the offer is deemed to be "not fair".

However, Affine still thinks the offer is "reasonable", hence their verdict: "not fair but reasonable, accept the offer". The rather ambiguous judgement that is quite common these days for independent advisers reporting on deals related to Bursa listed companies.

The most important part of the report is probably this:

Are both assets indeed worth only about RM 320M? I have read much higher valuations than that.

The problem that I have in general with many of the privatisation exercises on Bursa is:

• Why are so many offers "not fair", is it not the duty of the Board of Directors to try to get an offer that is "fair" to all shareholders?
• Why is there almost never a competing offer? In this case, Delloyd could have tried to sell its estates individually, to check if there is an interest in them, and if so, at what price. If the price is indeed good, then it could propose to sell the asset and distribute the proceeds to all shareholders. Has the Board of Directors actively tried to find buyers for its assets?

From "not fair but reasonable" to "only partially free and not fair"

Many people wrote about the "not fair but reasonable" judgement, used so often these days by independent advisers regarding corporate exercises.

The Institute for Democracy and Economic Affairs (IDEAS) has issued a report about GE13, titled "was GE13 free and fair?". The report is 124 pages long (apparently Malaysians really like long reports!), and issued today, quite soon after GE13 has ended. Its conclusion is "we conclude that GE13 was only partially free and not fair".

So there we go again, although the words used are different, the one thing in common are the words "not fair". Probably quite typical, since (unfortunately) Malaysia is not a very fair country. Most likely (partially) caused by the fact that Malaysia has the highest score on the Power Index in the world:

The PDI measures the distribution of power and wealth between people in a nation, business and culture, and seeks to demonstrate the extent to which subordinates or ordinary citizens submit to authority.

Returning back to the IDEAS report about the GE13, the eight reasons given were:

(1) The media was heavily biased in favour of Barisan Nasional. State-funded media platforms have been abused to project partisan views to the public;

(2) There were doubts about the EC’s impartiality and competency despite their many efforts to improve the electoral system. They were seen as being part of an already biased civil service. The fact that EC members repeatedly issued statements that could be construed as partisan did not help. Their defensiveness when criticised further angered the public;

(3) Trust in the integrity of the electoral roll is low. This resulted in the public being very cautious when there were reports of foreigners being flown in, when they saw foreign-looking individuals, or when the indelible ink was seen as ineffective;

(4) The Registrar of Societies did not treat all political parties equally, delaying the registration process of non-BN parties;

(5) Constituency sizes are too unequal, allowing parties that win many smaller seats to win parliament, despite not commanding popular support;

(6) Financing of political parties is not transparent, resulting in a big lack of clarity about the financial standing of the competing parties;

(7) During the campaigning period, government and armed forces facilities were repeatedly used for campaigning purposes during the official campaign period;

(8) Racial issues were dangerously exploited for political gains. There were many instances of BN fishing for votes by sowing mistrust between the Chinese and Malay communities.


Some of the above issues were acknowledged in the excellent article in The Edge, "Malaysia at Crossroads".

For more background in the Malaysian elections, I strongly recommend the articles from Bridget Welsh, especially "Disturbing questions surrounding GE13 polling".

We definitely hope Malaysia can move forward and improve a lot on all the issues raised.

EPF/Petronas, "not fair but reasonable", MBf

[1] P Gunasegaram wrote an article on KiniBiz about EPF accepting Petronas' revised offer for MISC shares under the title: "Shame on you EPF!".

I can't agree more on the article, I strongly recommend to read the full article.

The new offer from Petronas was an improvement of less than 4%, a much too low offer. Why did the EPF so hastily accept this offer that is still way below the fair valuations and below the rights issue a few years ago?

Keeping MISC listed would ensure a healthy dose of transparency, something that Petronas itself also could do with.

It looks like a typical case of "face" where both parties can claim some credit:

• EPF claims that they are actively fighting for the shareholders (I have very strong doubts about this claim), they booked a victory since the price has increased;
• Petronas can claim that they only raised the price by a small margin, in other words the first offer was also "pretty decent".

[2] Errol Oh wrote in The Star: "Mixed feelings over mixed advice".

"A lot of people are befuddled by the on-going streak of independent advisers (IAs) describing general offers and proposed deals as “not fair but reasonable” and yet recommending that shareholders accept the offers or vote for the deals."

I do like to add that there are two improvements compared to the old situation:

• The majority of the delisting offers is deemed to be "not fair but reasonable", while in the past it was almost always "fair but reasonable". At least now the minority shareholder know they are (hugely) disadvantaged.
• The quality of the independent advices has improved recently. There are still some bad examples, but these are more rare. In the past the quality was so low, that I recommended to simply do away with the independent advices, they were a waste of money and time and even worked against minority investors.

For instance, "Where Is Ze Moola" wrote about the horrific delisting of IOI Properties at RM 2.60 in 2009 while a rights issue not too long time before was done at RM 6.25. The "independent" advice from OSK Investment Bank was "fair and reasonable" and recommended the shareholders to accept the offer. This kind of advice would typically cost around RM 500,000. I don't think it was worth the paper it was written on.

"Early this week, a wire report had stated that IOI Corp was planning an initial public offering (IPO) of its property arm in the fourth quarter of 2013, speculating the total value of the listing to be in the region of RM10bil.

This would be a huge improvement in size, considering that it was only in 2009 that IOI Corp had bought back its then-listed property arm IOI Properties Bhd for a mere RM310mil in cash and shares, valuing the unit at about RM1.3bil."

In only 4 years time the value of IOI Properties would have increased by a factor 8? Do the previous minority investors of IOI Property still believe that the offer price of RM 2.60 was indeed "fair and reasonable"?

Another really bad case was the delisting and relisting of Bumi Armada, about which I have written before.


[3] Gurmeet Kaur wrote about the offer for MBF: "Happy ending for MBf minority shareholders":

"The group of minority shareholders who had, for some time now, been holding out for a higher price in the buyout of MBf Holdings Bhd have decided to throw in the towel and accept major shareholder Tan Sri Dr Ninian Mogan Lourdenadin's latest revised offer of RM1.775 per share."

I would not exactly call that a happy ending, RM 1.775 is still way below the estimated Net Assets per share between RM 2.45 and RM 3.20. Holding unlisted shares is simply not an option for most investors, and thus they were pressured to throw in the towel. Still kudos for the minority investors, they did put up a decent fight, but the odds were hugely stacked against them.


It is about time the authorities are looking into this situation: delistings at unfair (low) prices, possibly followed by relisting at inflated prices. They should make the playing field between majority and minority investors a more even one, it is long overdue.

Stating "these corporate exercises were business decisions" will simply not do.

"Not fair but reasonable", OTC, delisting, Bursa

Where is Ze Moola blogged many times about the "not fair but reasonable" issue, for instance here, here, here and here.

Malaysia-Finance wrote this article about it.

I am happy to say that the mainstream media also paid attention to it, The Sun here (an interview with MSWG's CEO Rita Benoy Bushon) and Business Times here.

These are all excellent articles. Just to add, some observations:

• The "not fair but reasonable" description is a clear improvement over the past ten years, when almost all deals were deemed to be "fair and reasonable", pity it had to take so long time before this change came through;
• Still, "not fair and (thus) not reasonable, reject the offer" would make much more sense; the "not fair but reasonable" judgement is (unfortunately) always followed by the advice to accept the offer;
• If a privatisation offer is deemed to be not fair, then the directors should explain why they could not come with an offer that is deemed to be fair, what they have done to unlock the value of the assets, if they actively have tried to get an outside offer, etc.;
• Companies are IPO-ed at a clear premium to their net assets, but many are privatised at a clear discount to their net assets, that doesn't seem right;
• Quite a few companies that were privatised were later relisted again, all at a much higher price, in other words minority investors lost out, in some cases big time;
• Most of these recent independent reports are regarding privatisations, I hope the advisers have the courage to judge Related Party Transactions also to be "not fair", because many are (unfortunately) not fair;

Regarding the delisting issue, Rita Bushon mentioned:

"Perhaps another suggestion is to have an over-the-counter platform for those minorities who wish to still remain in the delisted entity until and unless a compulsory acquisition is triggered," said Bushon.

"This would motivate majority shareholders to offer a better price at the outset and the minority would be more fairly dealt with. (But) this suggestion needs to be studied more in detail with the implications."


A letter to the editor of today's (Singapore) Business Times from Dennis Distant mentions the same:

"SGX needs to look at circuit breakers, OTC

When SGX extends its activities to new fields, it rightly deserves credit and receives it.

However, in its strategy to adopt the features of leading world bourses like NYSE and Nasdaq, it seems to have ignored features like "circuit breakers" and, more importantly, facilities to assist shareholders of companies which get delisted, leaving them with useless paper certificates although in theory they can still sell the shares if they can find a buyer somewhere.

NYSE offers the OTC (over the counter) facility and, though of less help but still an option, the "Pink sheet" for shares in companies not listed on major exchanges.

With the increased instances of delisting since SGX began inviting China-based companies to list here as what became known as the now infamous 'S-chips', it behoves SGX to help out the many victims created when these counters and others were eventually moved off the SGX boards.

Can SGX comment on the absence of circuit breakers, OTC and PINK Sheets from the list of services? Getting delisted is the end of the road but being moved to OTC can lead to a new lease of life as is currently the case in the US with American Airlines and Eastman Kodak."


Regarding the delisting and relisting issue: questions were asked on Bursa's AGM (from The Edge Malaysia):

At the AGM, a shareholder also asked what Bursa's role was following an  increasing trend of listed companies being taken private, wiping billions off the exchange. And after several years, these companies got relisted.

"When [privatisation and relisting of the same companies] happens, I think someone is making money but not us shareholders," remarked the shareholder.

To that question, Tajuddin responded:

"Bursa has engaged with its stakeholders on this. The conclusion was that these corporate exercises were business decisions .


I find that a very unsatisfactory answer, I think Bursa Malaysia should analyse this important matter and come with a much more equitable solution. That is, if it is really serious about trying to get retail investors back to Bursa.


Claire Barnes wrote:

"Efficient capital allocation is so important that stock exchanges should be run in the public interest. In practice, ownership by member brokers often worked quite well. Running stock exchanges for profit sets up huge conflicts of interest. I have noted some of these in the past. Others are clearly explained in this article on Bursa CEO pay and lack of retail investors. Stock exchanges are too important to be listed companies!"


The good news about this all: the attention to these (and other) issues shows increasing maturity in the Malaysian market.

Independent advice: "not fair but reasonable"

Article in The Star by John Loh: More cases deemed ‘not fair but reasonable’

"In March 2010, the SC had - in an effort to raise the standard of independent advice by getting independent advisers to conduct deeper analysis and disclose more information to shareholders - issued a consultation paper that led to the additions to Practice Note 15 of the Code on Takeovers and Mergers 2010.

The revised guidelines took effect from Nov 1 last year.

The new rules essentially decoupled the terms “fair” and “reasonable” as two distinct criteria, with “fairness” referring specifically to valuation and “reasonableness” to elements other than valuation.

“The decoupling of the terms will further ensure that independent advice circulars are more easily understood, transparent and provide clear bases to justify a recommendation,” the SC had said."

Thirteen independent advises in the above table:

• 4 times "not fair but reasonable", language that is used when the price offered is less than its fair value, but at least it offers a option for the shareholder to sell (instead of holding shares in an unlisted company);
• 4 times "not fair and not reasonable", not necessarily against the wish of the majority shareholder, it could be a take-over offer at a low price where the majority shareholder wants to keep the company listed;
• 5 times "fair and reasonable".

Two remarks:

• This is a huge change from the past when almost always deals were deemed to be "fair and reasonable", the change is good; the average standard is also better than in the past (with some exceptions);
• Why are so many proposals deemed to be "not fair"? Do the Board of Directors fulfill their fiduciary obligation to work for all shareholders? Can they not come more often with deals that are deemed to be "fair"? In the case of privatizations, have they really tried to unlock more value?

The SC and Bursa Invite Comments on Proposed Best Practice Guide on Independent Advice Letters, latest by tomorrow (January 31, 2013). The documents can be found here.

My comments regarding this Guide:

• In general the guide appears to be good;
• However, guidelines are only of use with strict enforcement. SC really needs to come down hard on errant independent advisers who write biased reports in favor of the majority shareholders;
• DCF (Discounted Cash Flow): in itself a good tool in certain areas (where reliable predictions can be made), unfortunately it is often abused (to come up with sky-high valuations) and therefore I would recommend to do away with it, my previous posting about this can be found here;
• I would stress reasonableness in valuation: for instance if a certain asset is acquired not too long ago and the current valuation is very different, good reasons should be given, I often miss this common sense approach;
• Data should be as up-to-date as possible: for instance I still often miss an up-to-date balance sheets and profit and loss account; also if the amount involved is large there really should be a recent audited account. In the KFC case the independent adviser compared the company with other companies based on share prices of one year old, this should not happen;
• For asset heavy companies like property developers or plantation companies: revaluation of assets should be done if the last valuation is done more than 3 years ago; Glenealy Plantations was privatised with its last revaluation done 14 years ago, in the midst of the Asian Crisis;
• Margin of safety: if the value of an asset depends on all sort of future conditions being met, then there really should be a decent margin of safety;
• Executive summary: I would prefer this always to be done.

Some general comments, not related to the Guide:

• A random assignment of a (non-conflicted) independent adviser to a specific case would increase the chance that the independent advisers is really independent; at the moment companies (that is the Board of Directors) can choose their own independent adviser;
• Independent advice should be send together with the main document, or at least not much later.