Loopholes plugged by SC

Article in The Star, some snippets:


An amendment to a securities law is to plug a loophole in the law that allowed parties to exclude liability for the veracity of statements made in marketing material related to corporate bonds.

The Capital Markets and Services (Amendment) Act 2015 (CMSA 2015) now makes it clear that any “document, agreement or contract” that seeks to exclude the liability of the issuer of that document from the accuracy and reliability of information in that document will be deemed as void.

In other words, this means that parties preparing information memoranda (info memo), that typically accompany the issuance of private debt securities such as corporate bonds, can no longer seek to exclude their liability.

The amendment effectively addresses the issues that arose following the 2014 decision of the Federal Court in the Pesaka Astana bond case.


I wrote several times about the Pesaka Astana issue (here, here and here).

More from the article from The Star:


The amendments to the CMSA also enhanced minority shareholder protection in the event of corporate takeovers and mergers. The amendment allows the SC to appoint an independent adviser for an offeree if the latter fails to appoint one.

Another good change.

I noted before regarding KPMG's independent advice on Maybulk's RPT:

I think that is highly debatable, I think there is a very good case to be made that KPMG is liable. Anyhow, I strongly recommend the authorities to come down hard on independent advisers who issue these kinds of statements:

If advisers don’t want to take any responsibility while at the same time they make very clear judgment calls which have consequences for the voting behavior of shareholders then they should simply not be allowed to be independent adviser.


I hope with the above changes that this issue is also settled.

To Cliq or not to Cliq? (4)

Cliq Energy announced the result of the fairness opinion by the independent valuation expert, Deloitte.

First of all, "good old" DCF is used. As usual, a long list of assumptions, some of which are very important:

Secondly, the result of the valuation is presented:

While the outcome of a DCF calculation can hugely change according to which parameters one uses, the final range of 113M to 124M falls "exactly" around the purchase consideration of 117M. Too much of a coincidence?

As usual, no details of the DCF are given, so we can't check anything of the actual calculation.

As often described in this blog, I don't like DCF valuations based on a huge amount of assumptions, some of which (for instance the amount of reserves, the price of oil, political/regional conditions, etc.) would alter the result by a huge margin.

Just to detail one aspect, how can one calculate the uncertainty of investing in a country like Kazakhstan? I honestly have no idea how to incorporate country or regional risk in an objective way in a DCF calculation.

On a more positive note, a comparison with similar deals is presented, something that makes much more sense to me:

The average price per boe (barrel of oil equivalent) of the three deals is USD 6.41, while Cliq only pays USD 5.82, that looks good.

But the most recent deal done is by Sumatec Resources (relevant since the price of oil and market conditions were similar to Cliq's) was done at a price of only USD 4.21 per boe. The question is why does Cliq pay 38% more per boe than Sumatec?

Unfortunately, there are no other details regarding the three deals, and how they compare to the proposed deal of Cliq (for instance the existence of assets or liabilities other than the oil reserves in the target companies).

The evaluation of Deloitte is that the deal is "fair and reasonable", which is no surprise because it was more or less announced before by the CEO:

"We know that it will fall within the fair market value, but I'm not saying 100% it will. We have intelligently analysed that the acquisition value is going to be within the fair market value unless oil prices fall to US$ 20".

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?

"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.

"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.

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.

The independent adviser challenge

Excellent article by P. Gunasegaram in The Star.


By all accounts what happened recently at Glenealy Plantations (Malaya) Bhd raised more than a few eyebrows and plenty of questions over how valuations should be done and why minority shareholders don't seem to be exercising their rights.

There are two aspects to this and both warrant further action and investigation by the Securities Commission and Bursa Malaysia. First, despite the very vocal opposition of the minority to the privatisation offer of RM7.50 per Glenealy share eventually only just over 4% voted against it. Second, why was the plantation land not revalued as part of the valuation process?

On the first point, perhaps minority shareholders thought if they did not accept the offer, there would be nothing else for them.

But really a premium of about 15% over the market price then prevailing in January this year when the offer was first made is not that much especially if it is a plantation company with undervalued land and which gives good dividend yields.

Besides, the broad market has moved up much since then, reducing the premium although some of this would have been made up by the 52.75 sen dividend the company paid out just before the meeting to approve the offer earlier this month.

Considering that just 331 shareholders held some 85% of the shares not controlled by the majority shareholder, the Samling group, it would be appropriate to trace the ownership to see when the shares had been acquired to ensure that everything is above board.

Together with this and other shareholders, just over 94% of shareholders voted for the privatisation, four percentage points more than the required 90%.


This is indeed puzzling, and the same point has been made in The Edge of September 17 2012 (page 5), titled "Surprise! Surprise" . It appears to be the duty of the frontline regulator, Bursa Malaysia, to investigate this. But I can not remember that this has ever happened, despite many dubious deals "miraculously" been voted through, with the majority shareholders abstaining. Is it possible that PAC's (Parties Acting in Concert) have been "underreported", that there were much more shareholders aligned to the PAC's? Bursa Malaysia should step up its enforcement in this particular field and at least be transparent about it.


The second and perhaps more important question was why there was no revaluation of the plantation assets for 14 years. Between the first announcement of the offer in January and the meeting in September, there were more than six months for this to have been done.

Some minority shareholders charged that if the plantation assets had been revalued, Glenealy would have net tangible assets per share of over RM10.

A revaluation would have clearly established if that was the case and removed all doubt. It would also have been material to the entire valuation process.

Independent adviser Hwang DBS made no comment on the valuation of the plantation land in its executive summary in the offer document and so shareholders did not have that piece of information to evaluate if they should accept the offer.


This is indeed a serious matter, Hwang DBS definitely should have mentioned this in their report. The last valuation was done in 1998, not only 14 years ago, but also in the midst of the Asian crisis. That valuation hardly looks relevant nowadays.


The Securities Commission has now come with changes to Practice Note 15 of the Malaysian Code on Takeovers and mergers by inserting 28 new paragraphs. The most significant of this is that in takeover offers independent advisers must analyse the terms “fair and reasonable” as two separate criteria.

An offer can only be considered fair if the offer price is higher or equal to the market price and the value of the securities of the target company. Otherwise, it is not fair.

If an offer is not fair, the independent adviser has some explaining to do. “Generally, a takeover offer would be considered reasonable' if it is fair'.

“Nevertheless, an independent adviser may also recommend for shareholders to accept the takeover offer despite it being not fair', if the independent adviser is of the view that there are sufficiently strong reasons to accept the offer in the absence of a higher bid and such reasons should be clearly explained,” the practice note says. Fair enough.

The new practice note also says the independent adviser has to consider and select the most appropriate valuation method and consider more than one valuation technique. It should compare the results and justify its choice, preferably a range which is as narrow as possible.

Generally, those new practice notes go a much longer way but do not go long enough in one particular direction. As the Minority Shareholders Watchdog Group has pointed out, the new notes don't make a revaluation of assets mandatory. A revaluation should be mandatory if there had been none for the last three years.

Even if all these were done, how does one ensure the independence of minority advisers? How does one ensure that they are not chosen based on an understanding that they will make the appropriate recommendation the board wants?

Tough problems call for radical solutions. Simply make it unnecessary for independent advisers to market for the job. All of them will simply be put on a queue by ballot and take the next job that comes along.

The fees will be on a scale according to the size of the job and the SC will remind them sternly that the recommendations will be purely professional and independent. Those advising the particular company on the deal will be disqualified.

Companies may object that they are paying for someone they did not choose but in this instance that's precisely what is needed to ensure that independent advisers are indeed independent.


Although the new practice note seems to be an improvement, I still think that the old rules were good enough to take action against errant independent advisors.

We have seen much too many independent reports that looked very biased in favour of the majority shareholders and it is puzzling why the authorities have not take any action whatsoever against those biased advisers. Here is one example from the past, and here another (but there are really dozens of similar cases). In both cases the authorities are well aware of the situation, they should be transparent to the public why no action has been taken and explain their non-action.

The advice to more or less randomly assign independent advisers looks good. But surely the authorities should also very much increase enforcement in this area. It is long overdue.

Raking Muck, Part 3 & 4

David Webb continued with his series "Raking Muck", Part 3 and Part 4.

In the latter one the following text, describing the situation in Hong Kong:

"Regulatory note: the "Independent Financial Adviser" system in the Listing Rules and Takeovers Code is a waste of shareholders' money and gives investors false comfort. However bad a company's proposal is, the company will almost always be able to find an "IFA of last resort" to say that the proposal is fair and reasonable, and investors may then be misled into voting in favour. When investors do vote a proposal down, it is usually against the advice of the IFA. The system is a gravy train for shoddy IFAs. It would be better to scrap the requirement for an IFA, and require the company to justify its proposal on its own, taking whatever advice it wants to prepare the circular. If the company can't convince shareholders of the merits, then it risks being voted down.An alternative would be a jury-pool system where IFAs are randomly assigned to deals by the regulator. Pricing for the work could be determined by an annual tendering exercise. A firm would only qualify for the next year's jury pool if investors had actually agreed with the firm's recommendations by passing or rejecting proposals at least (say) 80% of the time. We proposed a similar such system in 2001."

It all sounds very similar compared to the situation in Malaysia. Independent advice in Malaysia is also not worth the paper it is written on. It actually often does more damage than it does good: it costs time (the delay to write the report) and money (paid for by the shareholders), and can be used as an excuse by Government Linked Funds to vote in favour, regardless how bad the deal is.

MUIB and PMCorp: a horrible deal from the past

"Ze Moola" attended me on a old corporate exercise from the MUIB stable. The "independent" report can be found here:

http://announcements.bursamalaysia.com/EDMS/subweb.nsf/7f04516f8098680348256c6f0017a6bf/afd99bbf47849e5848256f2b001970f4/$FILE/PMCorp-Circular.pdf

In short, Malayan United Industries Bhd. (MUIB) had borrowed RM 1,067,000,000 from related party Pan Malaysia Corporation (PMCorp), if would not or could not pay the amount back, a horrible and highly unsatisfactory situation for PMCorp shareholders.

The only thing MUIB could do is hive of some assets to PMCorp, but it decided to give the PMCorp shareholders shares in MUIB. Problem was that MUIB's shares were trading at only RM 0.185, that would mean that PMCorp were entitled to about 6 billion MUIB shares. Aparantly that was not what the Majority Shareholders of MUIB had in mind, therefore an ingenious scheme was designed. A pretty complicated one so that most Minority Investors would not be able to see through it. Instead of shares it would give ICULS, Irredeemable Convertible Unsecured Loan Stocks. These are Irredeemable, in other words they can not be redeemed for cash, you can (or will, there is no choice) somewhere in the future convert them 1:1 for MUI shares. They don't pay dividend like shares but interest, but even this would be paid in even more ICULS. This looks already bad for PMCorp shareholders, instead of cold hard cash they would get shares in a company that had been making huge losses over the last years. But what is simply amazing is the small number of ICULS they would receive, instead of the about 6 billion one would expect (RM 1,067 million divided by RM 0.185 = 5.8 Billion), they received less that 1.3 Billion ICULS. Minority Shareholders of PMCorp were thus hugely short changed, for more than RM 800 million.

The "independent" report from Hwang-DBS Securities Bhd. was of extremely low quality, I won't bother writing what was wrong with it (about everything), will just give their conclusion:

Let's check their arguments:

(i) The par value of MUIB shares: the par value has nothing to do with valuation. The fact that the NAV of a MUIB shares is way below the par value means it has accumulated huge losses, which is an indication of a badly managed company. By even suggesting the par value HWANG-DBS is simply deceiving Minority Investors.

(ii) The ICULS can only be converted to shares in the future: that is a disadvantage, not an advantage.

(iii) The future prospects of the MUIB group: the report was dated 12 Oct 2004, MUIB was thoroughly mismanaged, had lost Billions of RM, why would that suddenly improve? The results since then:

2004: RM -405 million
2005: RM -371 million
2006: RM -210 million
2007: RM +10 million
2008: RM -74 million
2009: RM +3 million
2010: RM +36 million

In total: losses of more than RM 1 Billion.

And what happened with the proposal and the circular? It was (as usual) approved by the authorities (Bursa Malaysia and/or Securities Commission), and neither the directors of PMCorp, MUIB or the "independent" advisor Hwang/DBS were ever punished in any way, shape or form.

Needless to say, the quality of the "independent" advice circulars in Malaysia has further gone down, 99% of them shamelessly support the Majority Shareholders, no matter how bad the deal is for the Minority Shareholders: "Whose bread I eat, his song I sing". And up to this very day, the authorities have not bothered to come down on the advisers.

Recommendation: Do away with the "independent" advice, it is hurting Minority Shareholder, not helping them.

MUIIND is currently trading at RM 0.21, the MUI ICULS are all trading at RM 0.17, PMCORP is at RM 0.09, PMIND at for RM 0.045 and PMCAP at for 0.085.

The renumeration for MUIB's Chairman and Chief Executive, Tan Sri Dato' Khoo Kay Peng, is more than RM 3.2 million a year.

EPIC: Majority Shareholder forgot to make a GO!

In The Edge, August 29, 2011 appeared the article “An EPIC lack of transparency”:

“Last week EPIC Bhd. Announced that Lembaga Tabung Amanah Warisan Negeri Terengganu (LTAW) and parties acting in concert had made a general offer (GO) for the shares they did not own at RM 3.10 apiece.

Apart from the GO to existing shareholders, LTAW plan to compensate those who had sold their shares at below RM 3.10 between Dec 10, 2010 and Aug 23, 2011. The cash payment will be the difference between RM 3.10 and the price at which investors sold their shares in this period.

So, why is EPIC so generous?

The trigger for the GO was the completion of the purchase of a 21.6% stake in EPIC from Ahmad Zaki Resources Bhd (AZRB) by LTAW on Aug 23. EPIC’s announcement says the purchase has lifted the equity interest of LTAW and parties acting in concert to 67.24% from 45.67%.

However, the acquisition process had started way back in on Nov 24 last year when LTAW signed a share sale agreement (SSA) with AZRB to buy its stake in EPIC at RM 3.10. The SSA became unconditional on Dec 10, triggering a GO, the latest announcement says.

The fact is, EPIC’s shareholders were not told that the controlling shareholder was obliged to make a GO. It is baffling why the offer was not made as soon as it appeared that the state, acting via LTAW, had triggered a mandatory GO.

In a takeover exercise such as this, transparency and adherence to the rules of corporate governance are of utmost importance. How can we expect compliance from the corporate sector when state authorities do not play by the same rules?”

Oh my, somebody has been sleeping on the job. And that was not the first time as it was already apparent in the 2010 year report:

EPIC Year report 2010

On page 222 (page 132 of the PDF-file) TISB (Terengganu Incorporated Sdn Bhd) owns 40.59% directly and indirectly. This is wrong since TIS’ ATA’ Ashar Sdn Bhd owned 3.89% of the shares and LTAW 0.98% of the shares, so the percentage of indirect controlled shares should have been 45.46%.

Unbelievable as it is, it seems to be an honest mistake, and the good news is that it is rectified, people who sold their shares in the past after Dec 10, 2010 will also receive RM 3.10. I wonder though what they would do if somebody was actively trading in EPIC shares, would he receive the full RM 3.10 every time he sold his shares and bought some back later on again?

If Bursa Malaysia had followed David Webb’s example, they also should have picked up on this mistake.

http://cgmalaysia.blogspot.com/2011/08/where-is-malaysian-david-webb.html


"Increase transparency by providing a Malaysian database similar to the one David Webb has provided on his website. This will be a useful tool for all serious investors and bring back their attention. Secondly, this will be a very useful tool for the enforcers themselves. Thirdly, journalists can tap from this source for their stories."

On the bad side, this is another GO with “delisting and compulsory acquisition threat”. Again, a GO is good, but I hate the "delisting" threat since Minority Shareholders don't stand a chance to fight it.

The “independent” advisor will most likely follow the wish of the majority shareholders (they do in about 99% of the cases in Malaysia), so Minority Shareholders will not stand a chance. On a side note: I hope that “independent” advices will be abolished soon, but if the Securities Commission decides not to do, then at least I hope they will rename them to “dependent” advices.

The public shareholding spread of EPIC is only 32.7%, since unit trust funds (there are quite a few funds from Public and Great Eastern invested in EPIC) will most likely not be allowed to hold shares in unlisted companies they will be forced to sell. The 25% barrier will be quickly breached, the 10% will most likely follow. Pity, since EPIC is a clearly better than average company:

Moody's: Fraud, Corruption, Greed

I blogged before about the non-event that S&P downgraded the AAA status of the US:

http://cgmalaysia.blogspot.com/2011/08/non-event-s-downgrades-us-to-aa.html

".. as usual, the rating agencies in the US have been hopelessly slow to adapt to reality. Similar to the enormous disservice they did a few years ago rating packaged mortgages as AAA while the collatoral was dubious to say the least. A huge bias due to the wrong incentive: if the agencies would offer high (unrealistic) ratings they would receive more work and thus more money."

There is more support for this:

"A former senior analyst at Moody's has gone public with his story of how one of the country's most important rating agencies is corrupted to the core."

"The primary conflict of interest at Moody's is well known: The company is paid by the same "issuers" (banks and companies) whose securities it is supposed to objectively rate. This conflict pervades every aspect of Moody's operations, Harrington says. It incentivizes everyone at the company, including analysts, to give Moody's clients the ratings they want, lest the clients fire Moody's and take their business to other ratings agencies. In short, Harrington describes a culture of conflict that is so pervasive that it often renders Moody's ratings useless at best and harmful at worst. "
Here are some key points:
 

Moody's ratings often do not reflect its analysts' private conclusions. Instead, rating committees privately conclude that certain securities deserve certain ratings--and then vote with management to give the securities the higher ratings that issuer clients want.

Moody's management and "compliance" officers do everything possible to make issuer clients happy--and they view analysts who do not do the same as "troublesome." Management employs a variety of tactics to transform these troublesome analysts into "pliant corporate citizens" who have Moody's best interests at heart.

Moody's product managers participate in--and vote on--ratings decisions. These product managers are the same people who are directly responsible for keeping clients happy and growing Moody's business.

At least one senior executive lied under oath at the hearings into rating agency conduct. Another executive, who Harrington says exemplified management's emphasis on giving issuers what they wanted, skipped the hearings altogether

http://globaleconomicanalysis.blogspot.com/2011/08/former-moodys-senior-vice-president.html

Munger and Buffett have often warned about giving people/institutions the wrong incentives, it will lead to highly biased situations (ironically, they did invest themselves in Moody's, one of the big three rating agencies).

In Malaysia we have exactly the same situation regarding the "independent" reports. It is in the benefit of the writers to follow the majority shareholders, writers who are critical of them will not be asked again for their services. It is therefore no surprise that these reports are so biased that they are completely useless.

Recommendation: Independent reports should be abolished and the Securities Commission and Bursa Malaysia should really have come down hard at the writers a long, long time ago. By not doing so they have done Malaysia a big disservice, credibility has suffered and Minority Investors had no chance to fight for their cause.

Abolish DCF models in circulars

Discounted Cash Flow analysis is a method to value a company (or project or asset), I refer to WikiPedia:

http://en.wikipedia.org/wiki/Discounted_cash_flow

I read an interesting post: on "Where Is Ze Moola":

DCF can lead to large mistakes

I 100% agree with his conclusions. If small changes in parameters lead to big differences in the outcome then one should take the results with a (large!) grain of salt. I think that predicting the future 10 years out is anyhow madness, whichever model is used. I think may be the only possible useful application for DCF is when one wants to compare two similar companies with each other.

As an "angel" investor I receive regularly Business Plan where profits are projected in the area of USD 50 million 5 years out, and we did not invest in them .... apparently we think the projections are "slightly" unrealistic. We did invest in some of them, but even if they "only" reach 1/10th of their forecast in Year 5 we would already be very, very happy. To be frank, I don't even pay attention to them at all, I just look how realistic the forecasts are for the first 2 years until the company is cash flow positive (which is already a major feat).

One of my Corporate Governance recommendations is to do away with the "independent" reports, since they are not independent at all: "whose bread I eat, his song I sing". I challenge the authorities (Securities Commission and Bursa Malaysia) to prove me wrong, to give the statistics how many times the "independent" reports did not follow the Majority Shareholders. I can only remember one single case out of many dozens. That alone already proves how unbelievable biased these reports are, and thus how useless they are (actually, they are worse, they are doing real damage to the Minority Investors).

In brochures where the DCF model is used the underlying assumptions are never revealed. Thus, the minority shareholders can never check or challenge the outcome. And since the reports are so biased, one can safely assume that the DCF valuations are also very much biased.

Which leads me to the following recommendations:

• Do away with all "independent" reports: they are very biased
• Do away with DCF valuations in all circulars: small changes lead to big differences making them very unreliable
• If (unfortunately) DCF models are still used, at least provide the underlying assumptions so that it can be checked how reasonable they are