The "battle" between SP Setia & PNB, another turn

On September 28, 2011 PNB made an offer of RM 3.90 for the shares of SP Setia:

http://cgmalaysia.blogspot.com/2011/09/battle-between-sp-setia-pnb.html

"The Board has met to consider the Offer and are of the view, based on external valuations of the Company by investment analysts published before receipt of the Offer, that the Shares Offer and Warrants Offer fundamentally undervalues the Company."

Subsequently, PNB and the Board of Directors of SP Setia started negotations:

http://cgmalaysia.blogspot.com/2011/12/stock-options-and-bonuses-to-entice-sp.html

"Permodalan Nasional Bhd (PNB) may be paying out lucrative bonuses and stock options to property developer SP Setia Bhd’s top management staff in order to persuade them to stay on with the company following an offer by PNB to increase its stake in the property developer."

However, minority investors, holding 55% of the shares of SP Setia, did not get a chance to be involved in these negotiations at all, they were completely sidelined.

A deal was struck and a new offer was proposed on January 20, 2012:

http://announcements.bursamalaysia.com/EDMS/edmswebh.nsf/all/482576120041BDAA4825798B00295D17/$File/Press%20Release.pdf

It turns out that PNB has increased its offer price by a measly 5 cent or 1 percent (in the mean while, the share market has increased much more since the last offer made), and that Tan Sri Liew (the CEO who received a put option from PNB to dispose his shares) switched sides and is now suddenly a joined offeror.

An offer price of RM 3.90 fundamentally undervalues the company, but an offer price of RM 3.95 is suddenly "fair and reasonable"? The share price of SP Setia traded several months in 2011 above RM 4, shareholders who didn't sell at that price are now supposed to accept this offer?

It will be interesting to read the offer document, both the opinion of the Board of Directors, and the independent advice.

This is what MSWG wrote about the revised offer:

MSWG's COMMENT: The original offer by PNB was unanimously rejected by the Board (except for interested directors) led by LKS, as the offer was deemed “fundamentally undervalued”. The property developer said it would seek rival bidders. Does the Board consider the revised, lightly adjusted offer prices fair given that: 1) it deemed the previous offer “fundamentally undervalued”, and 2) the Bursa Malaysia Properties Index closed at 839.06 points on the date the original offer was received and has since appreciated 21% to close at 1012.48 points on the day the revised offer was received?

Besides the above issues, there is also the matter of increasing nationalisation and crowding out of the private sector:

http://cgmalaysia.blogspot.com/2011/10/towards-nationalisation-and.html

The way this whole exercise has been conducted looks very disappointing given the parties involved: a large Government Linked Investment Company and one of the "blue chips".

YTL: why so stingy? (3)

In The Edge today a good article about the take over offer of YTL Cement by YTL Corporation.

http://www.theedgemalaysia.com/in-the-financial-daily/200327-ytl-cement-minorities-stuck-between-a-rock-and-a-hard-place.html

The writer analyzes the situation that minority investors are stuck between a rock and a hard place. A situation that is unfortunately very common in Malaysia when the acquirer uses the dreaded "delisting threat". Minorities have to choose either accepting an offer that is not favourable (or sometimes even outright bad) or holding on to unlisted shares. And in the last case they still risk that their shares are mandatory acquired.

The fact that independent advisers are writing recommendations that always follow the majority shareholders ("whose bread I eat, his song I sing"), is making things much worse. The authorities (SC and BM) do have a very clear mandate to act in these cases, but they simply refuse to use it.

I was therefore rather surprised that the CG Blueprint 2011 completely ignored this very disturbing problem.

Added to this, both YTL Corp and YTL Cement are not obliged to hold an EGM, a rather surprising waiver from Bursa Malaysia.

YTL has a special section about Corporate Governance, full with beautiful sentences:

http://www.ytl.com.my/CorporateGovernance.asp

But actions speak louder than words ......


"YTL Cement minorities stuck between a rock and a hard place", written by Max Koh, 2 February 2012

It would appear that YTL Cement Bhd’s minority shareholders are stuck between a rock and a hard place when it comes to accepting YTL Corp Bhd’s offer to take the former private.

Last December, the conglomerate made a conditional share exchange offer to buy the remaining shares and outstanding irredeemable convertible unsecured loan stocks (ICULS) in YTL Cement that it does not own at RM4.50 and RM2.21 respectively.

The share exchange would be settled with the issuance of YTL Corp shares of 10 sen each at RM1.42 per share. This translates into an exchange ratio of 3.17 YTL Corp shares for every YTL Cement share, and 1.56 YTL Corp shares for every YTL Cement ICULS.

The offer, which will be closed on Feb 10, 2012, raised eyebrows as YTL Corp received a waiver from Bursa Malaysia to hold an extraordinary general meeting (EGM) to obtain YTL Corp shareholders’ approval for the share swap. 

YTL Corp based this waiver on the grounds that it has obtained authorisation from its shareholders at its annual general meeting (AGM) last November to issue up to 10% of its current issued shares without the need for shareholders’ approval. YTL Cement was also not required to hold an EGM. 

As such, the deal would go through without an EGM at YTL Corp and YTL Cement.

Hwang DBS Investment head of equities Gan Eng Peng said YTL Corp had provided a poor share swap for the minority shareholders of YTL Cement, adding that the minorities could not object to the offer as no EGM would be held, and the offer does not include a premium.

“Furthermore, YTL Corp’s high effective shareholding means it is very easy to delist YTL Cement, forcing the minorities to accept the poor deal,” Gan told The Edge Financial Daily. 

YTL Corp already owned 47.4% of YTL Cement on Jan 9, 2012, the posting date of the offer document . As at Jan 20, it received acceptances for an additional 9.62% stake in YTL Cement which nudged up its interests to 57.02%, hence making the offer unconditional. Feb 10 will be the first closing date for the offer.

Gan said the share swap is essentially a case of Hobson’s Choice for YTL Cement’s minorities who have little to benefit from the share swap, whether they accept or reject the offer. 

Gan noted that if the minorities accept the offer, they would be trading for less attractive YTL Corp shares which are more expensive and provide less dividend payout.

For FY11 ended June 30, YTL Corp and YTL Cement declared two sen and 13 sen in dividends to their shareholders respectively. The dividends represent a yield of 1.4% for YTL Corp shares at RM1.42 each, and 2.9% yield for YTL Cement shares based on the offer price of RM4.50 each.

Gan also noted that the minorities would be switching their investment to a conglomerate, which is less favourable than a pure-play stock. 

The latest statements ended Sept 30, 2011 showed that YTL Cement was in a net cash position, while YTL Corp had RM28.34 billion in borrowings and RM12.97 billion in cash.

As at Sept 30, 2011, YTL Corp’s and YTL Cement’s net assets per share were RM1.20 and RM4.76 respectively, for FY11, YTL Corp posted a net profit of RM1.03 billion or 11.53 sen per share (basic) and 11.44 sen (fully diluted). YTL Cement, meanwhile, recorded RM337 million in net profit, with earnings per share of 71.53 sen (basic) and 48.44 sen (fully diluted).

At the offer price of RM4.50, YTL Cement is being valued at 0.95 times book, while the shares it will receive in YTL Corp are priced at 1.18 times book.

On a price-earnings ratio (PER) basis, YTL Cement is priced at a historical PER of 6.3 times, while the YTL Corp shares are issued at a PER of 12.3 times — almost twice that of YTL Cement shares.

On a fully diluted basis though, the PER valuation gap narrows, with YTL Cement valued at 9.3 times and YTL Corp at 12.4 times.

If the minorities were to refuse the offer, Gan said they would end up with YTL Cement shares that are less liquid as other parties would have accepted the share swap.

Note that YTL Corp already owned a 57.02% stake as at Jan 20.

In its announcement to Bursa Malaysia, YTL Corp said it does not intend to maintain the listing of YTL Cement if it does not meet the public shareholding spread of 25%.

YTL Corp and parties acting in concert (PAC) currently have a 96% stake in the ICULS. If the ICULS are fully converted, YTL Corp and PAC would own 67% of YTL Cement’s enlarged share capital.

“It would be easy for YTL Corp to increase its shareholding from 67% to 75% and force a delisting. In an EGM called for delisting, all shareholders, including PAC, can vote and there should be an exit offer of the same nature”, said Gan.

In addition, a minimum 90% acceptance level of the outstanding shares would result in a mandatory acquisition by YTL Corp of YTL Cement shares, including those that belong to the dissenting shareholders.

As such, Gan noted that the outcome is not favourable for YTL Cement’s minority shareholders, whether they accept the offer or not.

Compared with the recent privatisation offers for Proton Holdings Bhd and QSR Brands Bhd which offered a premium to the minorities, it appears that YTL Cement is left with no clear winning choice.

While the share swap is an easy deal for YTL Corp to privatise its subsidiary at a low price, observers are concerned that it would become a precedent for similar deals in the future.

ACGA gives feedback on CG Blueprint 2011

http://www.acga-asia.org/

"The Asian Corporate Governance Association (ACGA) is an independent, non-profit membership organisation dedicated to working with investors, companies and regulators in the implementation of effective corporate governance practices throughout Asia. ACGA was founded in 1999 from a belief that corporate governance is fundamental to the long-term development of Asian economies and capital markets."


ACGA gave its feedback on the Corporate Governance Blueprint 2011 from the Securities Commission. The full feedback (7 pages) can be found here:

http://www.acga-asia.org/public/files/ACGA%20Response%20to%20CG%20Blueprint%20(final%20draft).pdf


Some items:

II. Mandate poll voting via amendments to the Listing Requirements and CG Code

The arguments presented by the SC for mandating voting by poll on only “substantive” resolutions, such as related-party transactions, as opposed to resolutions that were “administrative or procedural in nature”3, do not address the fact that companies and shareholders may disagree on what constitutes an administrative resolution and what is a substantive one. As has been seen over the past few years in Asia and globally, issues such as director re-elections and approving audited financial accounts may seem “administrative”, but are now considered substantive by many shareholders. The argument that a show of hands empowers minorities also fails to take into account that controlling shareholders can easily ask for a vote by poll should they not “like” the results from a vote by a show of hands.


In other words, ACGA likes poll voting on all issues.



Chapter 2: Role of Institutional Investors

Recommendations
I. Formulate a new code for institutional investors
• Institutional investors to drive the formulation of a new code and publish their commitment to the new code for institutional investors.

II. Create an industry driven umbrella body for institutional investors
• Institutional investors to work together towards the establishment of an umbrella body.

ACGA: These suggestions are well-intentioned and we fully support the idea of institutional investors taking on a more proactive role in corporate governance. However, we question whether these ideas will bear fruit at this stage in Malaysia? Is the investment industry ready? As one fund manager in Malaysia pointed out, unit trust fund managers, government fund managers and other fund managers do not belong to the same institutional framework and are often lobbying against each other; hence the idea of an institutional investor-driven stewardship code might not be feasible at the moment.

It is worth noting that Malaysia has not seen a great deal of engagement or activism by local institutional investors, whose usual policy has been and, for the most part, continues to be “voting with their feet”.

Khazanah Nasional, the investment holding arm of the government, has a mandate to transform certain industries “with the objective of pursuing the nation’s long-term economic interests”. While this makes them active investors, their specific mandate is not necessarily closely aligned to other institutional investors. The Employees Provident Fund, another government agency, has also become increasingly interested in the governance of its investee companies, and in 2010 published its “Corporate Governance and Voting Guidelines”. Yet, beyond these two institutions we have seen little evidence of engaged shareholders, other than a few institutional investors, such as Aberdeen Asset Management and Corston Smith.

"It is worth noting that Malaysia has not seen a great deal of engagement or activism by local institutional investors": this must be the understatement of the year, and not only applies to institutional investors but also to retail investors. Shareholder activism in Malaysia is, as far as I can judge, almost non-existent. SC and BM should take a good deal of the blame for this.

The praise for the EPF is really too much in my opinion, except for initial funding of MSWG and publishing its voting guidelines it has been very quiet, much too quiet. This is a large institute with all the necessary facilities, manpower and money, they could have done such a better job if they had wanted to do so.


We also agree that creating an industry umbrella body for institutional investors is a good idea. Once again, however, some fundamental questions need to be asked. Who will lead it? Who will fund it? Moreover, such a body needs to be independent. It should not be set up by the government or with government funding. We believe this would defeat the purpose of such a body.


Chapter 3: The Board’s Role in Governance

We agree that the chairman and CEO should be separated. While we understand that most companies that currently have a separate chairman and CEO only follow the letter of the guideline rather than the substance, imposing an independence criteria on a company’s chairman could, we fear, only lead to more box-ticking.

In this context, it is worth emphasising that the quality and authority of an independent chairman is critical. Most Asian listed companies—and Malaysia is no exception—are either family-controlled or majority state-owned, hence it is very likely that any “independent chairman” will be loyal to the majority shareholder. We would suggest that it would be better to mandate the recommendation made in the Corporate Governance Code that a board nominates an INED to be the senior independent director to whom concerns may be conveyed. The lead independent director would be responsible for, among other things, ensuring that independent directors can perform their duties responsibly; call meetings of the independent directors as needed; serve as principal liaison between the independent directors and the chairman and senior management; and respond to shareholder and other stakeholder questions and comments.

With regard to the question of allowing a former CEO to become the chairman after a “cooling-off” period, it is extremely unlikely that a former employee would ever be completely free of their loyalty to the company in the Asian context. A “cooling-off” period, therefore, would not have a great deal of meaning in this context. One of the expectations that the SC has for the Code is the “diligent exercise of voting rights”5. We suggest that the SC starts with this first and mandate a policy whereby institutional investors would need to publish their voting policies and also how they have voted at AGMs annually. The Thai Securities and Exchange Commission put such a policy in place in 2005.

MF Global: A Despicable State of Affairs

"And perhaps this is why the American people are turning away from their corporate-branded presidential candidates and Congressional representatives, whose approval ratings have fallen to 9%, in righteous indignation and revulsion, in disgust at their craven betrayal of their sacred oaths and trust. They must have no sense of justice, or of proportion, or history, and apparently they have no shame."

It sounds like the US has not learned anything from the financial crisis?

http://jessescrossroadscafe.blogspot.com/2012/01/mf-global-despicable-state-of-affairs.html

Much of the financial press picked up this story from the Wall Street Journal, Money From MF Global Feared Gone. Much of the mainstream media in the US and the UK these days is just a conduit for sound bites from the monied interests.

"Nearly three months after MF Global Holdings Ltd. collapsed, officials hunting for an estimated $1.2 billion in missing customer money increasingly believe that much of it might never be recovered, according to people familiar with the investigation.

As the sprawling probe that includes regulators, criminal and congressional investigators, and court-appointed trustees grinds on, the findings so far suggest that a "significant amount" of the money could have "vaporized" as a result of chaotic trading at MF Global during the week before the company's Oct. 31 bankruptcy filing, said a person close to the investigation."

And as we have heard, quite a bit of that money was also diverted in the last few days into the pockets of MF Global's bank, JP Morgan, which still reportedly holds much of it. Now whether they are legally entitled to keep that money is another matter. But this entire charade has been cloaked with a public relations campaign using terms like 'missing,' 'vaporized,' and 'mystery' to describe the customer assets as if no one really knows where the funds had gone, which the CFTC has explicity stated months ago is not the case. And that the handling of the bankruptcy and the method of ordering customers with creditors is in violation of the CFTC's rule 190, as is evident from the precedents and intentions which established it.

What the press apparently has not yet heard or is not reporting is that vulture funds are now contacting the MF Global customers, however they may have obtained their names, and are offering them 85 cents on the dollar for their claims.   Most of the claim holders are reported to expect or to have been payed 72 cents on the dollar as things now stand.   The Wall Street Journal certainly casts gloom on their prospects for a full recovery and hopes of justice, based on the report from an unnamed source.

This is creating a difficult position for these much abused customers because of the need to settle their income tax obligations for 2011. Until they can prove the funds are not 'recoverable' they bear the responsibility for their tax obligations on the full amount. But if they settle with the vulture funds they can take the loss and move on, capitulating to the despair and the anxiety of having been cheated and abused by the partnership between government and Wall Street.

Obviously customers can ask for extensions on filing their taxes and hope for a settlement at some point. But the issue is the odd manipulation of the bankruptcy in the courts, and the uncertainty and fear fostered in the customers caused by the management of this situation through rumour and innuendo and the canard of the 'missing money' from almost day one.

Remember that the customers were not speculators who lost money on their bets, as the bailed out banks had been, but in many cases were depositors who had cash and valid title to precious metals and treasuries held on account in a firm that was one of the Fed's primary dealers and a major player at the CME.  And the money was taken twice.  First by MF Global, and then by the financial institutions that seized the money and then manipulated the courts and the press to hide it and to keep it.

The theft of customer funds was bad enough, but the manner in which the exchange, the regulators, the court, the Congress and the Obama Administration have dealt with the aftermath of this is truly despicable. Throughout the financial crisis the character of the public's dealings with the financial sector has been dominated by of opacity, obfuscation, misuse of influence, abuse of power, and fear.
If I have ever seen the opportunity for those in the government to take a heroic stand in defense of the people against the predations of powerful financial interests this was it. And they have failed miserably. So whatever these politicians now say seems at best a shallow mockery, with the ring of untruth, and the hollowness of hypocrisy.

And perhaps this is why the American people are turning away from their corporate-branded presidential candidates and Congressional representatives, whose approval ratings have fallen to 9%, in righteous indignation and revulsion, in disgust at their craven betrayal of their sacred oaths and trust.

They must have no sense of justice, or of proportion, or history, and apparently they have no shame.