Scrap the public float rule

Today's article "Quek’s poker game for HLCap" in The Star written by Risen Jayaseelan regarding Hong Leong Capital (HLCap) raises many interesting issues:

• As off February 25, 2013 Hong Leong Financial Group (HLFG) only had 81.33% of the HLCap shares, not enough to delist the HKCap;
• Yu Kuan Chon appeared on the scene, and although he is not linked to HLFG, his holding was so large that it wasn't counted in the free float; hence the free float was deemed to be too small and the shares would be delisted;
• However, after Yu sold some shares, the 10% free float was restored again;
• Lee Jim Leng, head of Hong Leong Investment Bank, has recently exercised 1 million HLCap options, causing the freefloat to be less than 10% again, hence there is the threat that the shares will be delisted again.
• According to this announcement, the share will indeed be suspended on August 12, 2013

And there is another, unconfirmed story:

"Incidentally, there is also some market rumours that this whole HLCap saga has had some collateral damage to another key Hong Leong personality, although this theory could not be verified. Stalwart banker, Datuk Yvonne Chia, resigned as CEO of Hong Leong Bank Bhd in March. The reason cited then was simply that she was retiring. But now rumours are circulating that Chia may have had to leave because she had failed to support HLFG's buyout by selling her holdings or stock options into the HLFG buyout of HLCap. All parties related to this story could not be reached for comment."


For the minority shareholders, the events have a large impact:


"The suspension of trading of a stock is always bad news for minority shareholders as it means they can no longer sell their shares in the open market. Hence the threat of suspension had worked to force minorities in buyout situations to throw in the towel in the past."

David Webb wrote about the same issue regarding South China Morning Post (SCMP), whereby Kerry Media Ltd (controlled by the Kuok family) used rather unorthodox means (by parking 225m SCMP shares with three investment bankers) to keep the SCMP listed (as opposed to the Quek family who want to delist HLCap).

Other constructions that are being used in Hong Kong is issuing unlisted shares to the majority shareholders, Webb gives several examples of this.


Some majority shareholders want to keep their company listed at all cost, some not. Financial engineers are coming up with solutions to satisfy the large shareholders, solutions that look terribly artificial.


As usual, David Webb has a very simple and transparent solution for this problem:


"The public float rule should be scrapped. Let the market trade. The market has full information on what the substantial shareholdings over 5% are (to the nearest whole percent) as required by law. Investors can make their own choice over whether they want to own shares in a small percentage float, whether it is a large company or a small one. Investors should not have to pay, via their companies, to execute convoluted bonus share schemes just to comply with the Listing Rules, and should not be at risk of having their money frozen in suspended shares purely because of the actions of other shareholders. This rule is not serving investor interests."

Protasco, MISC, HL Cap, Bintulu Port

Protasco:

I wrote before about Protasco's latest quarterly report, leaving out all relevant information regarding their huge (and puzzling) acquisition of an oil & gas company in Indonesia. Protasco has amended its quarterly report three times (possibly urged by the authorities?), and in it's fourth attempt it finally got it right.

Instead of

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

The new text is:

"21. Corporate Proposals
Save for the following and the Proposed Private Placement mentioned in Note 9, there was no other corporate proposal announced but not completed in the current quarter up to 14 February 2013, being the last practicable date from the date of the issue of this report: -

Proposed Acquisition.

On 28 December 2012, AmInvestment Bank Berhad (“AmInvestment Bank”) on behalf of the Board of Directors of Protasco Berhad (“PB”) has announced that PB had on 28 December 2012 entered into a conditional sale and purchase agreement with PT Anglo Slavic Utama to acquire 95,000,000 ordinary shares of IDR1,000 each in PT Anglo Slavic Indonesia (“PT ASI”), representing 76% equity interest in PT ASI for a proposed purchase consideration of USD55,000,000."

Not one iota extra information, but that was to be expected: Protasco has not been transparent at all, and apparently prefers to pursue this chosen path.

How one can "forget" to report about its private placement, and even more important, its RM 170 million acquisition is a mystery to me.

MSWG gives out prices for the companies with the best Corporate Governance, I would like to suggest to also give out prices for companies displaying the worst Corporate Governance. I would like to propose Protasco as a possible candidate in the last category.


MISC:

MISC has released the report by the independent advisor AMInvestment Bank.

Its conclusion is: "not fair but reasonable".

Its fair valuation is in the range of RM 5.69 to RM 6.10, therefore the offer price of RM 5.30 is not fair.

Why reasonable? Because Petronas "threatens" with delisting and compulsory acquisition, and at least this is an opportunity for shareholders to exit.

Luckily the independent advice does give the long term graph of MISC, clearly showing that the price offered is at a huge discount to the prices in the previous years (only at a premium compared to the price in the last year).

I have big problems with this deal. Petronas is owned by (the people of) Malaysia, why can't it offer a fair price to the MISC shareholders?

Not too long time ago shareholders subscribed to rights issue priced at RM 7 per share, all those shareholders are sitting on substantial losses.

Also, I still haven't heard any good reason why Petronas wants to privatize MISC. As the majority shareholder, what can they do after the privatisation which they can't do in the current situation?


Hong Leong Capital:

Bursa Malaysia has issued an UMA (Unusual Market Activity) to Hong Leong Capital, the company announced that it

"is not aware of any of the following that may have contributed to the unusual market activity:-

1.       any corporate development relating to HLCB 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.       any rumour or report concerning HLCB Group’s business and affairs that may account for the unusual market activity; and

3.       any other possible explanation to account for the unusual market activity."

UMA's have more bite in them since the Can One case, so good Bursa Malaysia issued it. I hope they are on top of the developments, it is a very puzzling and intriguing case.


Bintulu Port:

Bintulu Port announced that it is seeking permission for a Private Placement (PP) of a massive 60 million shares (15% of its issued and paid-up capital) at a 5% discount to its major shareholder. MSWG is questioning why the company is not resorting to a rights issue, giving all shareholders the opportunity to participate.

I don't like Private Placements at all, if they ever occur they should be small (say up to 5% of the issued shares) and at a very low or no discount. Under the current rules, the potential of abuse is simply too large, the authorities should look into this issue. But good that MSWG questioned the PP of Bintulu Port.

Hong Leong Capital to be delisted: many questions

I received the following anonymous comment:

"I saw this news and thought it was disgusting. I must say the adventurous shareholders who do not sell got a pretty good deal but not to those who sold at the news of takeover."

And a link to the article in The Star:

"Trading in Hong Leong Capital Bhd's shares will be suspended on April 15 as it does not meet the public shareholding spread. Its last trading day will be on April 12.

Bursa Malaysia Securities said the suspension is under the Main Market Listing Requirements.

At the close of trade on Wednesday, Hong Leong Capital's share price was up 40 sen to RM3.40, which was nearly double the RM1.71 takeover offer price by Hong Leong Financial Group Bhd (HLFG).

On March 1, Hong Leong Capital said following the close of the unconditional voluntary take-over offer by HLFG to acquire all the remaining Hong Leong Capital shares not already held by HLFG for RM1.71 per offer share, the public shareholding spread was 9.66% as at Feb 28.

Hong Leong Capital said it was not in compliance with Rule 8.02(1) of the Listing Requirements. It also said the public shareholding spread was also lower than the 20.42% level of public shareholding spread accepted by Bursa Securities.

Bursa Securities then said it would suspend the trading of Hong Leong Capital shares immediately upon the expiry of 30 market days from March 1.

The suspension would take effect on April 15, which was the market day immediately following the expiry of 30 market days from the March 1 announcement.

This meant the suspension would only be uplifted by Bursa Securities when it fully complied with the required public shareholding spread or as may be determined by Bursa Securities.

However, Hong Leong Capital had then stated it did not have any plan to address the non-compliance with the public shareholding spread requirement."


Although the take-over offer had hardly any acceptance, the company will still be de-listed.

The authorities have been very quiet on this case, while many rumours have been flying for quite some time. I think it is very much needed that they at least announce they are investigating this case.

At the very least the case is puzzling, but some will say it is "disgusting", as the anonymous commenter wrote. Most likely relating to the feeling that the small investors have hardly any power at all on the Bursa, where the big boys are perceived to rule.

Bursa Malaysia and the Securities Commission really should level the playing field more.

What exactly has been going on here in this case, will we ever know?

The only good part is that courageous minority investors who held out, can currently sell in the market at a nice price. But the ones that have sold at a more early stage, how are they feeling?

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.