"Repco Low": Justice delayed is justice denied

Article from Malaysian Insider's website, in chronological sequence:

• Low (former executive chairman of Repco Holdings Bhd) was alleged to have instructed a representative of Sime Securities Sdn Bhd to buy Repco Holdings shares by taking up any offer price of the shares by sellers on the Kuala Lumpur Stock Exchange. This was an act calculated to create a misleading appearance with respect to the price of Repco shares on the share market. He committed the offence at the 21st floor of Sime Securities, Bangunan Sime Bank in Jalan Sultan Sulaiman, Kuala Lumpur between 11am and 5pm on Dec 3, 1997.
• Low was charged in the Sessions Court in 1999
• On Nov 14, 2006, the Sessions Court acquitted Low without ordering him to enter his defence after finding that the charge against him was defective.
• On Oct 15, 2010, the High Court dismissed the prosecution’s appeal and upheld Low’s acquittal.
• February 28, 2013: The Court of Appeal here today ordered businessman Low Thiam Hock, popularly known as Repco Low, to enter his defence on a charge of share manipulation.

Every old hand (and I am myself one) remembered the "Wild West" days when Repco was trading above RM 100. I still remembered a buy-recommendation from my broker (TA Securities) at around RM 110, with a price target of RM 160 (I can't remember the exact details, but roughly these numbers should be correct). It all had to do with a lottery license which might or might not get approved. However, bubbles don't last forever, and reality did strike, also for Repco's share price.

In 1995 Repco was trading at RM 4.36, this is what happened:

"At the Sessions Court, expert witnesses testified that the price of Repco, which opened at RM108.50 per lot closed at RM113 on Dec 3, 1997. The very next day, the court heard, when there were no buying activities, the price tumbled to RM110 and further dropped to RM11.20 in three weeks."

The offence allegedly took place in 1997, but 16 years later the court case is still on going? Quite unbelievable. As they say, "Justice delayed is Justice denied".


The Securities Commission has initiated another case which also involved "Repco Low", the article can be found here.

"From September 2005 to May 2006, the price of Iris shares rose by 17 times from eight sen to close at a high of RM1.36 on the back of very strong demand with an average of 200 million shares being traded daily. The SC’s investigation found that the manipulation was carried out through a complex layering of the origination of the orders and transactions via foreign intermediaries in several jurisdictions"

AirAsia's dividends: generous but appropriate?

AirAsia published its 4th quarter results. The (in general good) results over the whole year were boosted by a one-off profit from listing their company in Thailand in a previous quarter, no surprise there.

Most remarkably was the large dividend payment, as described by The Star:

"It has also declared a special dividend of 18 sen, on top of a final dividend of 6 sen, which will bring the full-year dividend per share (DPS) to 24 sen. This translates to a DPS yield of 8.4% at RM2.86."

There are two very large financial concerns (next to increased competition from Malindo) regarding AirAsia, their debt and their capital commitments:

 

 

Total Debt stands at RM 8.4 Billion (and increasing) while Capital Commitments are almost RM 65 Billion (also increasing), and the company is paying out rich dividends?

If the company fails (due to the heavy debt burden and/or the capital commitments), the company might be deemed to be "too big to fail" by the government.

And that means that (as usual) the taxpayers are on the hook, to save the company.

Considering that, is the new, generous, dividend policy really appropriate? Should it not preserve cash to ensure it can meet its financial obligations?

Listing panel lacks investors

In Singapore an eleven man committee is formed to review the listing rules. Its members consists of:

SGX's deputy chief regulatory officer, bankers, lawyers, auditors and corporate services and corporate finance professionals. There is also a representative from the Singapore Institute of Directors.

Not a single representative from institutional or retail investors. But they are the ones who will lose money if governance issues crop up in listed firms, say observers.

From the Business Times article (in full to be found on the Singapore Law website):


Because of this alleged conflict of interest, the rules could, in the end, tip the scales towards lower entry standards and letting more firms list, which could be dangerous for investors, they argue.

In recent years, thousands of investors have lost cash in some S-chips - China companies listed here. These firms were allowed to list here but several of them were later caught up in accounting or governance scandals.

"Most of them (the committee members) will benefit from more listings," said corporate governance expert Mak Yuen Teen, an associate professor at the National University of Singapore.

"I'm not saying they are not people of integrity but it's a fact that most of them will benefit from more listings. Investors' representation is sorely lacking."

MBF, HLCap, MRCB

I often receive requests to look into certain corporate matters. I don't have as much time as I would I had, but will make a quick round-up of three deals that are hugging the limelight:


[1] Regarding the privatisation of MBF, MSWG is organising a forum on Thursday 28th February at 11AM, at MSWG's Training Centre in KL:

"Some shareholders have raised questions whether the earlier announcement by the Board on dividend arising from the sale of MBF Cards & Services would be paid to them. The privatisation is Tan Sri Mogan Lourdenadin's third attempt to take control of MBF Holdings. In 2010 Mogan had tried to take MBF private through a proposed selective capital reduction and repayment exercise by offering 65 cents per share, but was unsuccessful after minorities rejected the offer due to the low price."


[2] There are several articles about Hong Leong Capital (HLCap), suggesting something is brewing in this privatisation exercise:

From The Star, February 19, 2013:

"Shares in Hong Leong Capital Bhd (HLCap) continued to overshoot the privatisation offer price of RM1.71 made by parent company Hong Leong Financial Group Bhd (HLFG), finishing five sen up to RM1.87 in a weak broader market.

Dealers contacted randomly by StarBiz said they were still puzzled by the broad ongoing buying despite scant indication of any price increase in the buyout offer.

Some dealers continued to speculate that parties friendly to the offeror could be continuing their buying of HLCap shares from the market presumably to ensure HLFG secures a high percentage of shares from acceptances of the general offer, which would then help make the case for the delisting of HLCap, the group's stockbroking, investment banking and asset management arm."

Another article from The Star, February 22, 2013:

"Meanwhile, a new substantial shareholder has surfaced in HLCap Datuk Dr Yu Kuan Chon, the chairman and executive director of publicly-listed and family-run YNH Property Bhd.

Yu, a low-profile former medical officer for the Government, rapidly increased his stake in HLCap to 17.24 million shares or 6.98% as at Wednesday from 14.67 million shares or 5.94% on Monday.

It is not known if Yu is a friendly party to Tan Sri Quek Leng Chan, the patriarch of the Hong Leong group, who is taking HLCap private via his flagship Hong Leong Financial Group Bhd (HLFG) for RM1.71 per share.
......

Dealers have speculated that parties friendly to the offeror could have bought HLCap shares from the open market to ensure HLFG secures a high percentage of shares from acceptances of the general offer, which would help make the case for the delisting of HLCap."


Investors should be very cautious making investment decisions based on the above, since it is mere speculation, as pointed out by The Star. But the matter at hand might have serious consequences for minorities. Parties acting in concert (PAC) should be identified, since the price to be paid by the offering party should be the highest paid by them or any PAC.

Bursa Malaysia should monitor this situation very closely and make sure that minorities are not disadvantaged, either by not receiving timely and accurate information, or in money terms, not receiving the offer price they are entitled to.


[3] MRCB announced a deal with Gapurna, this matter is rather difficult, I refer to articles on the website of KiniBiz:

MRCB-Gapurna deal raises eyebrows
EPF says good to have entrepreneur head MRCB
MRCB-Gapurna: Salim defends deal, explains role
Could the EPF have done more?

And lastly, as a stark reminder that one should not mix politics with business:

MRCB’s chequered past colours its future

"With its political clout, MRCB grew to own such choice assets such as 20.2 per cent in Commerce Asset Holdings Bhd which owned Bank of Commerce Bhd (now CIMB)—via NSTP, a chunk of power generation companies like Malakoff Bhd, Sepang Power and Port Dickson Power among a whole host of other large assets."

How many billions of ringgits would the stake of CIMB alone be worth now, if only they still owned it?

"For its financial year ended August 1999, the company suffered losses of about RM1.45 billion from RM235.39 million in revenue. As at August 1999, MRCB was saddled with short term borrowings of RM923 million while the company long term debt commitments were RM473 million. On the other side of the balance sheet MRCB had cash and bank balances amounting to RM38 million."

In the Asian crisis many dreams came crashing down to Earth.

"Eventually MRCB was acquired by EPF in an apparent rescue of the group."

And that is how the EPF became the controlling shareholder.

Can-One reprimanded, seven directors fined RM 350K

Bursa Malaysia issued the following Media Release:

"Bursa Malaysia Securities publicly reprimands Can-One Berhad and fines seven directors a total of RM350,000"

The facts are rather clear:

The share of Can-One suddenly took off in high volume:

On January 5, 2012 Bursa issued an "UMA" (Unusual Market Activity) query. This is pretty standard when the share price of a company changes a lot.

Can-One replied the same day:

"1. There is no corporate development relating to Canone Group’s business and affairs that has not been previously announced that may account for the unusual market activity including those in the stage of negotiation/discussion.

 

2. We are not aware of any rumour or report concerning the business and affairs of Canone Group that may account for the unusual market activity.

 

3. We are not aware of any other possible explanation to account for the unusual market activity."

One day later, on January 6, 2012 however, Can-One issued the following announcement:

"The Board of Directors of Canone is pleased to announce that the Company has on 6 January 2012 been advised by its solicitors that the Federal Court had on 5 January 2012 allowed the Liquidators' Appeals, including the Liquidators' Appeal to proceed with the completion of the sale of 146,131,500 ordinary shares of RM0.25 each held by KJ Holdings in Kian Joo at RM1.65 per share for an aggregate consideration of RM241,116,975.00 to CISB."

Bursa Malaysia was probably not too pleased with the two statements which seem to contradict each other, and concluded:

"CANONE’s announcement dated 5 January 2012 (issued at 7.20 p.m.) was inaccurate, not factual and hence, in contravention of its disclosure obligation under the Listing Requirements.

Bursa reprimanded the company and reprimanded and fined the seven directors each RM 50,000.

Good action by Bursa, also within a reasonable time limit. Too often I noticed the rather "automatic" reply "we are not aware of any rumour/report/explanation" by companies on an UMA query, so a decisive action will hopefully deter future breaches of the rules.

Trading in the share should have been suspended by the company the moment the Federal Court made its decision, giving all shareholders a reasonable time (say one day) to digest the information.

For me just one question remains: why did the directors breach the rules? Just an honest/lazy mistake, a case of miscommunication, or was something else going on, did (any of) the directors benefit from their action?

Protasco, BFM interview

One kind soul pointed me at an BFM 89.9 interview with Datuk Chong Ket Pen, General Managing Director from Protasco. The interview can be found here. For those people who also like the video, the link is here.

The part about the oilfield acquisition starts around 19:30. Some quick notes by me, and my comments in purple:

• Due diligence is in process, a consultant has been appointed (would it not be better first to do due diligence and then do a deal?)
• Protasco has no real experience in oil & gas, but also in engineering, so hopefully synergy with their current engineering (many experienced hands burned their hands at the notoriously difficult industry)
• RM 170 million is the asking price, might be negotiated downwards (again, why the hurry, why not investigate first?)
• The RM 50 million cash paid is securitized and will be returned if the S&P agreement is cancelled (but against which securities at what value in which account, no details have been provided)
• There will be a profit guarantee which will be the basic justification of the deal (but only secured against shares which represent a small part of the deal)
• The deal is subject to renewal of the concession, which will expire in 2014 (again, why the hurry, why not first renew the concession?)
• An announcement will be made 5/6 weeks later than the interview (January 29, 2013), so somewhere in the middle of March 2013
• The previous Executive Deputy Chairman resigned a few months ago, no reason given
• The 10% Private Placement was meant for the oilfield acquisition

All rather vague, as far as I am concerned, all the red flags are still there. Most importantly, there is no justification whatsoever for either the purchase price or the profit guarantee. It is not that the company that will be acquired made any profits that are comparable, in the contrary, the numbers provided were tiny and loss making.

We will have to wait how things will develop.

Protasco, where is the transparency?

I wrote in January Protasco's Puzzling Purchase based on an announcement by Protasco, made in December 2012, to acquire for RM 170 million a part of an Indonesian company, which owns a part of a company, which owns a part of a company, which owns a license until 2014 to exploit an Indonesian oil and gas field.

The number of red flags and lack of information regarding this deal were rather stunning.

It is now almost two months ago and no news has been reported regarding this huge deal.

Yesterday the (amended) quarterly report for the year ending December 31, 2012 was announced.

One would expect to get at least an update regarding this matter, but mysteriously, there is nothing to be found.

Some snippets from the report:

"9. Subsequent events
There were no significant events subsequent to the end of current quarter under review.
 
10. Changes in Composition of the Group
There was no material changes in the composition of the Group during the interim period ended 31 Dec 2012."

16. Commentary on Prospects
The Group is also exploring new business opportunities to complement the existing
business segments. Barring unforeseen circumstances, the Board of Directors is reasonably optimistic that the Group will be able to improve its performance in the next financial year.

21. Corporate Proposals
There were no corporate proposals announced but not completed during the current quarter."


And even in paragraph "12. Capital Commitments" there is no mentioning of the possible acquisition which would impact the company so much.

Finally, "hidden" in the cash flow statement we can find the following:

"Net cash outflow on acquisition of a subsidiary (RM 50,000,000)"

And since PT Asi is not yet a subsidiary, I am not even sure if this statement is correct.

It does not look like Protasco is aiming to win the prize for the best Corporate Governance. The lack of transparency on its proposed acquistion is remarkable, to say the least.

So far Bursa Malaysia, Securities Commission and MSWG have not yet visibly taken action (Bursa Malaysia has not even queried Protasco), but hopefully they are working on the case behind the scenes.

"AirAsia X may be listed after elections"

Article in the Business Times:

"The listing date of AirAsia X, the long-haul affiliate of Asia's largest low-cost carrier AirAsia Bhd, is uncertain now amid rumours that it could be delayed. AirAsia X chief executive officer Azran Osman-Rani is keeping mum on any new timeline for its initial public offering (IPO).  "Let's see Tune Ins first," Azran said, when contacted by Business Times yesterday to comment on a Wall Street Journal report that the IPO could be delayed because of the coming general elections."

I wrote before about Air Asia X in this posting, I was not exactly very impressed, by Air Asia nor by its prospectus.

In the mean time Air Asia X has audited its 2012 year result. I definitely hope the numbers are better than the previous years, since its operational results (excluding foreign exchange gains and deferred tax assets) have been strongly negative.

I wrote: "Quite amazing that a company with such a poor track record would be allowed to be listed on Bursa Malaysia."

From the Business Times article:

If the company raises RM 760 million from the sale of 790 million shares, then the price per share is RM 0.97, or not?

And finally:

"This is the time to be cautious since everyone expects the market to fall. Once the market stabilises, then it would be all right for a company to be listed," he said.

If I learned one thing in 20 years investing, then it is that there is no such thing as a sure thing. If everyone expects something, then often the opposite happens.


PS: KiniBiz is launched, first impression is good.

Huge dilution for SP Setia shareholders

SP Setia has announced a private placement (PP) of 321 million shares (15% of the outstanding shares) at a price RM 2.94 per share, a 7% discount to the market price.

According to this article in The Star, Affin Investment Bank likes the PP:

"We are generally positive on the announcement. We believe there are several long-term benefits from the shares placement".

But strangely enough, Affin doesn't mention at all what happened before regarding the General Offer by PNB. I blogged about the controversial issues regarding this GO.

The independent advise from AmInvestBank was that the price of RM 3.95 was not fair and not reasonable, and recommended shareholders to reject the offer.

So how is it possible that an offer at RM 3.95 is not fair and not reasonable, while a private placement (to a few selected parties, minority shareholders are not able to participate) at a 26% lower price is "generally positive"? To make things worse, the exercise will even cost the company about RM 10 million in expenses.

I wrote about private placements in the past.

David Webb launched his "Vampire" project, and proposed a maximum of 5% of the outstanding capital for private placements at a discount of maximum 5%. In other words, the PP of SP Setia would fail on both of his criteria.

Unfortunately, this is not the only dilution, there will be more. The company announced a "Long Term Incentive Plan" (LTIP) of options and grants, up to 15% of the outstanding shares, which could lead to another 369 million shares.

"Serious Investing" made an excellent post about this.

What I would like to add is that the prospectus of the LTIP was very vague how much it actually would disadvantage the minority shareholders. Although this lack of transparency seems to be normal in Malaysia, it is rather strange, since the disadvantage can be easily calculated:

• Shares given out for no consideration: the cost is the number of shares times the share price; if the company would buy back this amount of shares (to make the exercise non-dilutive), that would exactly be the cost
• Options given out: there are valuation tools like Black-Scholes to calculate the intrinsic value of them

The circular writes:

"Only an accounting treatment?" I assure the reader that although there is indeed no cash outflow, there is a very real disadvantage for the minority shareholders, a large dilution, and that the potential cost is not "only an accounting treatment".

People who invested when SP Setia was listed would have done very well. However, that is not a reason to be cheerful about these two, highly dilutive exercises. Minority shareholders will be diluted by about 32%, and that is huge, by all standards.

Although these exercises are brought to vote, realistically minority shareholders have no chance at all to fight them. They should therefore be better protected by legally limiting the size of both private placements and incentive plans (like ESOS and share grants).

And circulars should really give a more transparent picture of the real cost involved for minority shareholders, either in money or in dilution.

Honesty can land you in jail in Greece

I wrote before about Greece, how they qualified to the EU by fudging the numbers and how Goldman Sachs made a truckload of money by helping doing this.

The following is from an article in The Spiegel:


He was hired to bring Greece's debt statistics in line with European norms. Now, chief statistician Andreas Georgiou faces jail time for allegedly producing inflated budget deficit numbers. He says he was merely being honest, and he has plenty of support in Europe.

When Georgiou decided in the summer of 2010 to take over leadership of the revamped, newly independent Greek statistics service ELSTAT, he never imagined that the position could land him a jail sentence. But at the end of January, felony charges were filed against Georgiou and two senior ELSTAT staffers for allegedly inflating the 2009 deficit. In other words, at a time when the rest of the world was furious that Greece had artificially improved the country's budget statistics, Greek prosecutors are accusing Georgiou of doing the opposite. Prosecutors acted after a 15-month investigation into allegations made by a former ELSTAT board member. If found guilty, Georgiou faces five to 10 years in prison.

At stake in the ELSTAT case is more than the credibility of a senior statistician, one who previously worked for 20 years at the International Monetary Fund. The entire bailout of Greece was based on the numbers provided by ELSTAT on the deficit figures for 2009 onwards.


Malaysia has it's own case with the chief economist of Bank Islam being suspended, days after he gave a lecture predicting different scenario's of the coming election, some of which involved the opposition winning.

Weekly roundup: MISC, growers scheme, RBTR

Wishing all readers happy holidays.

Petronas & MISC
More and more pressure is mounted on Petronas to increase their offer price and on EPF to reject the current offer on the table.

P Gunasegaram wrote about the issue in Malaysiakini, the article can be found here for free. The article is very good, I strongly recommend it to the readers, nothing more to add.

MSWG has also entered the battle, in "The Observer" dated February 7, 2013 they write (emphasis mine):

"As the offeror already held 62.67% of total MISC shares, it requires another 27.33% to reach not less than 90% to have MISC delisted. However to compulsorily acquire MISC the threshold level must reach 96.3%. And to ensure the privatisation is successful and accepted by the minorities a better price should be offered.

In addition, the points to note for readers are as follows:

1. Shipping is mired with many challenges and low freight rates. More importantly we need to understand the long term contracts at good rates versus that of spot transactions which are subjected to competitive rates.
2. MISC disposed the loss-making liner business, thus the situation should look more promising for the company.
3. Last but not least MISC had issued rights issue at RM7.00 in 2010 for every 5 shares held. Based on this the average cost per share was about RM8.25 and with the offer price of RM5.30 per share, investors who had subscribed would suffer a significant loss.

We will look at it again the fairness of the offer upon the issuance of the offer document."

As usual, I have nothing against a General Offer, in the contrary, but I hate those accompanied by a "delisting and compulsory acquisition threat", against which minority shareholders have hardly any chance. In this particular case, should minority shareholders who decided not to sell when the MISC shares were going for around RM 8 (between 2005 and 2011) be pressured to sell at a much lower price?

EPF claimed it is actively fighting for its rights, this case might be good to prove it means business.


Country Heights Grower Scheme
"All's well that ends well."

Many questions are still not answered, like:

• Were the investors properly informed about the marketing expenses?
• Were the investors timely informed about the situation of the low yields at the plantation?
• Was the independent report of sufficient quality, highlighting all important issues?
• Why the hurry, with all being scrambled just before CNY?

But the result (with the improved offer and the faster handling of all money within six months) looks pretty good for the investors. At the end of the day, it is the result that counts. A good day for shareholder activism in Malaysia.

Still a good moment for the authorities to relook at the whole saga, if things can be improved regarding these alternative investment schemes.

For a long list of related articles, please visit MSWG's website on this subject.


RBTR

The Securities Commission has filed a suit against RBTR and seven other defendants:

RBTR ASSET MANAGEMENT BERHAD
AL ALIM BIN MOHD IBRAHIM
VALENTINE KHOO
LOCKE GUARANTY TRUST (NZ) LIMITED
LOCKE CAPITAL INVESTMENTS (BVI) LTD (British Virgin Islands)
ISAAC PAUL RATNAM
NICHOLAS CHAN WENG SUNG
JOSEPH LEE CHE HOCK

The details can be found on the website of the SC. I have written about this case before.

“We are concerned that no further action was taken because the case involves Bank Rakyat chairman Tan Sri Dr Syed Jalaludin Syed Salim and Bank Rakyat managing director Datuk Kamaruzaman Che Mat,” he added. Bank Rakyat had once held a 20 per cent stake in RBTR and lent its “Rakyat” name and logo to RBTR, then called Rakyat BTR Capital Partners Sdn Bhd, when RBTR had solicited funds from the public from mid-2007 till mid-2008. Syed Jalaludin and Kamaruzaman were directors of RBTR before Bank Rakyat sold its stake in 2008.


Searching for "Rakyat" in the statement of claim gives the following three hits:

26. In early 2007, Isaac was introduced to Al Alim by one Tan Sri Dato’ Dr. Syed Jalaludin Syed Salim, the then Chairman of Bank Rakyat Berhad and Director of RBTR, to explore new business opportunities.

43. At all material times during the marketing and/or promotion of the EDI Scheme to Malaysian investors , RBTR described it self as “Rakyat BTR”, an “associate of Bank Rakyat Group’. SC contends that RBTR therefore deliberately gave the impression to the Malaysian investing public that its products were in fact associated with and/or were endorsed by Bank Rakyat, which representation was in fact untrue. SC further contends that this representation was critical towards inducing the Malaysian investing public to invest in the EDI Scheme.

107. Particulars of Breach: (d) (i)
using the “Bank Rakyat” logo and describing itself as an “Associate of Bank Rakyat” in the EDI Scheme Promotional Material without the knowledge or acquiescence of Bank Rakyat knowing that this was likely to be material in inducing investors to participate in the EDI Scheme;


We need to wait for details from the civil suit to find out more details regarding this case and Bank Rakyat and its directors, enough questions remain. For instance:

• Bank Rakyat must have noticed that RBTR was promoting the EDI Scheme with the Bank Rakyat logo on it, did it take immediate and decisive action?
• Did Bank Rakyat have a 20% stake in RBTR, if so when did it dispose of it?
• Who were the directors of RBTR from mid-2007 until now, are they all included in the civil suit, if not why?

"Better independent advice free from influence please"

Good follow up article in The Star about independent advice. Some comments by me in red.

The task of producing independent advice to shareholders is never an easy one. There is a lot of subjectivity involved, and just like many other issues faced in life, there's always a variety of views on any one subject or circumstance.

 

The key word here, though, is “independent”. That means the view of the advisor has to be free from any other influence, other than putting the interests of minority shareholders at the heart of the advice.

 

But recent analysis by StarBiz (see StarBiz, Jan 29, 2013, page 5) on independent advice shows one odd fact that in many of the buyout cases where the offeror was seeking to maintain the listing status of the target company, the independent advisor (IA) had recommended that shareholders reject the offer. And conversely, where the buyer was seeking to privatise the listed company, the advice to shareholders was to accept the offer. Is this merely coincidental, namely, that the offers by those wanting to keep their target companies were not compelling?

 

And that in cases where the buyers wanted 100% of their target companies, the offers were attractive enough to nudge the advisors to suggest to shareholders to just take the offer on the table?

 

Or are the IAs merely dishing out advice which is aligned to what the offerors in those deals wanted?

Unfortunately, this has been going on for a very long time, a huge majority of the advice is indeed aligned to the majority shareholders.

 

It's difficult to say, either way. What can be assessed, though, is the quality of analysis contained in the independent advice. Over the years, some progress has been made with IA reports, the most notable being the initiative by the Securities Commission (SC) in 2010 to decouple the fair and reasonable tenets of the IA. Now, advisors can talk about valuation issues under the “fairness” umbrella, and all other elements under the “reasonableness” provision.

 

It does seem that there's less of an issue with the “fairness” part of the advice there are textbook measures to look at this, ranging from book values, multiples of earnings and peer comparisons.

 

But it's the “reasonableness” part of the analysis that has room for improvement. Some background to this: StarBiz had already highlighted in our Jan 29 article that since the SC had revamped its IA guidelines in 2010, the “not fair but reasonable, and therefore accept the offer” outcome has been the most dished out recommendation by IAs.

 

The fear is that this is fast becoming the de facto advice, a sort of easy way out to justify the advice to “accept the offer” in cases where the offeror wanted to de-list the target company.

 

Hence, to ensure that this perception isn't correct, independent advisors would need to put in more effort on the “reasonableness” part of their report. For instance, to merely say that the offer is reasonable because the shares of the target company are illiquid is, to put it mildly, irrelevant. If the shares were illiquid, then the right thing for the company to do would be to address this by issuing more shares, or for the controlling shareholder to place out some of its shares. 

Another is the oft-used scare tactic by offerors, reinforced by the independent advisor, that the company would be de-listed once the public spread was no longer met. Whether a company is de-listed due to not meeting its public spread is entirely in the hands of Bursa Malaysia and not automatic.

 

Excellent comments. Interestingly enough, there is a rule that minority shareholders should not be disadvantaged or pressured in these kind of corporate exercises. I claim that that rule can actually be used in these cases. The worst cases are those where the controlling shareholders first cut the dividend, making the shares even less attractive. The authorities should really look into these issues.

This, of course, is not to be confused with the compulsory acquisition rule, where under the Takeover Code, the offeror can compulsorily acquire the remaining shares once he already had acceptances from 90% of the minority shareholders.

 

More attention needs to be focused, for example, on the prospects of the business or new regulations that put the target company in a precarious spot. That's the kind of information that would resonate better with shareholders who have to decide if they are going to bandy together to fight a buyout exercise or give in, because the offer on the table is the best prospect they have.

"This is going to end badly"

Interesting article from PFP Wealth Management can be found here.

Three interesting charts, two of which are from Dough Wakefield:

This chart looks rather scary. If companies ran into troubles in 2001/01 and 2008/09 but survived, then their valuations should be relatively cheaper now. But if companies did go bankrupt, then value was destroyed permanently for investors in those companies.

I am less negative than the writer of the article, shares are probably in general somewhat expensive, but not overvalued as much as in 2000 or 2007.

The above chart shows that high yield bonds also went up a lot. The article therefore poses the question:

"Straightforward analysis of these two charts happens to fire a torpedo into the current thesis that we should all be preparing for some kind of ‘Great Rotation’ out of bonds and into stocks. What are we all supposed to do if stocks and (in this case, high yield) bonds are both expensive?"

And another, intriguing question:

“Is it possible that the big banks, after never having more than $60 billion in excess reserves between 1957 (oldest date I could find on a Federal Reserve website) and the end of 2008, are sitting on more than $1.5 trillion at the end of 2012 because they are preparing for a massive DEFLATION of asset prices in the future ? What about big corporations, who recently reached their largest amount of cash on record ?”

That sounds indeed puzzling.

Another observation by the writer:

We note that Credit Suisse has now run up the white flag on gold, declaring that the precious metal “appears significantly overvalued”. By comparison to what, exactly ? Or as expressed in what, exactly ? We think Credit Suisse’s gold analysts understand as much about gold as Kermit the Frog or any other of the Muppets. The chart below, for example, shows the extent to which central banks have recently inflated their balance sheets:

Indeed, a remarkable correlation. The kind of chart that reminds me that countries that report extraordinary low inflation of 1% or 2% (Malaysia is one of those, but there are many others) might significantly under-report the real numbers.

And the last observation of Tim Price:

"So while we can state with a high degree of certainty that this mess really will end badly, we can’t state with any certainty over what time period it does so. So we are quite content to shelter in a variety of sensibly selected and genuinely disparate asset classes, and meanwhile pick fights with any and all comers who seem to have grave difficulty in distinguishing between nominal price returns and  substantive, lasting value. Pay your “money”, and take your choice."

MISC taken private: "fair and reasonable?"

MISC announced that it has received an offer from its major shareholder, Petronas, to take MISC private, for a price of RM 5.30 per share.

The Star wrote the following, with some comments from me in red:


In the takeover notice issued to MISC, Petronas said it did not plan to maintain MISC's listing status.

Petronas said the offer was conditional on having received valid acceptances, which would result in Petronas holding 90% or more of the total MISC shares.

In other words, a privatization deal with delisting and mandatory acquisitition "threat", a rather frequent combination against which minority shareholders in Malaysia hardly stand a chance.

MISC's other substantial shareholders are the Employees Provident Fund at 9.66% and Skim Amanah Saham Bumiputra at 6.35%.

These shareholders can together block the deal, but will they? Will they fight in the trenches with the other shareholders, seek publicity, trying to get a higher price? I doubt it, although I hope I will be proven wrong.

However, the proposed buyout has surprised many analysts, as it came at a time when the shipping giant was turning around after several quarters of losses. It was also coming close on the recent C$5.2bil (RM16.16bil) takeover of Canadian-listed Progress Energy Resources Corp by Petronas.

Zulkifli Hamzah, head of research at MIDF Amanah Investment Bank, said: “We are caught by surprise by the privatisation of MISC, especially as it had gone through a kitchen-sinking exercise in late 2011 or early 2012 and would have, therefore, been in a much better financial shape.”

He added that while the petroleum tanker division was still suffering from high supply in the sector, recovery should be due in the near future.

“Nevertheless, the decision to delist MISC reflects the stance of the controlling shareholder that the market is not doing justice to the valuation of the company. 

But is that fair? The company is turning around, the market has not yet realized that, the share price is therefore historically very low, and exactly on that moment Petronas wants to buy out the minority shareholders with the infamous "delisting threat"?

Another analyst said: “I think Petronas just feels that MISC's valuation is at a rock bottom, and it can add a lot more value by restructuring the business away from the public eye.”

I definetely hope not that MISC will be delisted, value being unlocked, and then a few years down the road is relisted again for a much higher price, so that Bursa can boast again about being such a popular IPO destination. I have seen this "game" being played too often already.

He, however, thought that the offer price could be higher.

“Our sum-of-parts calculation for MISC is RM6.20, so RM5.30 is not fair'.”

MISC's bottomline has been volatile in the recent past due to the challenging shipping business. But it was turning the corner following the sale of its liner business in December 2011.

Below the historic 5-year share price of MISC. Long term shareholders who bought the stock more than  a year ago will be sitting on huge losses.

Some time ago a book was published "The Emerging Markets Century: How a New Breed of World-Class Companies Is Overtaking the World"  by Antoine van Agtmael. The whole book was about emerging markets, but although Malaysia was the darling of the emerging markets in the nineties, not even one paragraph was written about the country, it had lost its status as preferred destination in the next century. 

The only exception was in the back of the book, where the author gave a list of 25 promising companies in emerging countries, and one single Malaysian stock was mentioned: MISC. The stock picks (incl. MISC) are all listed in this blog posting. 

With hindsight (but then again, with hindsight we are all experts), it was not a good stock pick, people who bought the stock would be sitting on pretty substantial losses. And with the current developments, it looks like they won't have a chance to recoup their losses.

Is Qihoo a fraud? (2)

I blogged before about Qihoo:

"Anonymus Analytics is at it again. This time they accuse Qihoo 360 of being a fraud, fastly overstating their webtraffic".

TechInAsia published a new article: "How Qihoo is Committing Fraud". One excerpt:

Earlier this week, we wrote about the double serving of bad news Chinese web firm Qihoo got when its apps were removed from the iTunes store and China’s State Administration for Industry and Commerce (SAIC) handed it an official warning for unfair competition. On Thursday, we finally got to see the details of Qihoo’s transgressions in the warning statement issued by the SAIC.

Qihoo has been using creepy trickery to get people to install its software for years. More than a year ago, New York-based Digital Due Diligence released details on 9 sketchy tactics Qihoo made use of to force users to install its software. A year later, has anything changed? No.

The warning statement the SAIC released yesterday details some of the tactics used by Qihoo to try to trick or force people into installing Qihoo’s software, and then keep it there once it’s installed. Here are some examples of things Qihoo has done, all from the SAIC warning statement:

• Making uninstalling the anti-virus software difficult.
• [Faking] incompatibility to prevent the installation of competitors’ software.
• Giving users of non-Qihoo browsers security warnings suggesting their browsers are unsafe.
• Using default settings to trick users into installing the 360 Browser along with Qihoo’s security software.
• Using forced upgrades to change users’ browser and homepage preferences.
• Tricking users into thinking the 360 Browser download is an official patch from Microsoft.

 

That last one is a particularly nasty trick Qihoo pulled this past August. Through its “360 Defender” security software, it send users what claimed to be a Microsoft Internet Explorer update patch titled KB360018 that professed to fix “an extremely dangerous security leak.” Users who accepted the patch were then forced to install Qihoo’s 360 Browser.

 

I suppose a warning from the government is better than nothing, but pretending to be Microsoft in order to spread your own software doesn’t just sound like unfair competition to me, it sounds like fraud. In fact, it is fraud, at least going by the dictionary definition. I’m not sure what Chinese law has to say on the subject, but if what Qihoo is doing is currently legal, it should not be, and if it isn’t legal, the company should be prosecuted, not just warned.

And then the article ends with:

Chinese regulatory authorities should do more to protect users from the fraud and trickery that is perpetrated by Qihoo and other companies like it. An official warning is a good first step, but it is not enough and it should have been issued years ago.