Stolen info SBM Offshore about alleged $ 250 million fraud (2)

I wrote before about this case: an angry former employee who allegedly blackmailed SBM Offshore and published a list of potential problem cases in the on-going bribery investigations.

Today, finally, SBM published their findings:

• The Company paid approximately US$200 million in commissions to agents during that period of which the majority relate to three countries: US$18.8 million to Equatorial Guinea, US$22.7 million to Angola and US$139.1 million to Brazil;
• In respect of Angola and Equatorial Guinea there is some evidence that payments may have been made directly or indirectly to government officials;
• In respect of Brazil there were certain red flags but the investigation did not find any credible evidence that the Company or the Company’s agent made improper payments to government officials (including state company employees). Rather, the agent provided substantial and legitimate services in a market which is by far the largest for the Company;

Other Countries
At the outset of the investigation, the Company froze all payments to agents and conducted a review and due diligence on sales agents in all other countries. As a result of that review the Company decided to discontinue certain agents. Also, the Company decided to no longer use agents in countries where it has a presence. The investigation team also specifically looked at other countries covered by the agreements with the agent used in Equatorial Guinea and Angola but in its evidence-based approach did not perform a further detailed investigation into these countries.


In the list of the angry ex-employee three Malaysian companies were mentioned: MISC, Barnado and Delcom. SBM Offshore apparently has not found anything wrong with these business relations. SBM Offshore has now a presence in Malaysia (Kuala Lumpur), and will thus not use agents anymore.

Stolen info SBM Offshore about alleged $ 250 million fraud (2)

KiniBiz picked up on the story on SBM Offshore and MISC (most likely after having read the story on this blog, although no source was mentioned) in their article:

"MISC named in global O&G bribery scandal"

KiniBiz asked for comments from MISC, which they could not give on time for that article.

However, today MISC has answered, in KiniBiz's article:

"Petronas’ MISC denies knowledge of bribery"

"At this point in time, we do not have any further information on the matter other than allegations that were made in Wikipedia and media releases made by SBM Offshore pertaining to the matter on Feb 7 and 10, 2014,” said the Petronas subsidiary in response to KiniBiz queries.


We have to wait for further information from SBM Offshore's side. Things have been going pretty slow there, the first allegations about possible bribery where reported in 2012.

From Reuters:

"It later disclosed it might have violated anti-corruption laws and could be subject to criminal investigation for alleged payments of bribes to officials in African countries. SBM Offshore has also said the investigation centres around potentially improper sales practices in two countries in Africa, and in one other country outside Africa, but said it was not possible to give more information or an estimate of the potential outcome."

This is the kind of language normally used when it looks like bribery did indeed happen. But what changed since last Friday is that the scale might be (much) bigger than initially feared, and that (some of) the management were aware of the bribery.

The COO was dismissed in 2013, in a rather "mysterious" announcement not mentioning the reason, but declaring that it was "not related to the operational performance of the projects in hand". The internet allegations did mention many times a person with the initials "JPL", which are the same as those of the COO.

Analysts now count on a possible very large fine for SBM Offshore, in the tune of RM 1 Billion to RM 2 Billion. Those amounts are peanuts for companies like JP Morgan, but not for SBM Offshore, who might want to use a rights issue to strengthen their balance sheet. Not sure though if the shareholders are too happy to draw their chequebook to pay for fines.

Stolen info SBM Offshore about alleged $ 250 million fraud

The share price of SBM Offshore, a Dutch company involved in the service industry for oil & gas, was hit hard last Friday on fresh allegations about corruption. The possible size makes it one of the largest recent cases of bribery.

The Dutch magazine Quote had published new information regarding this matter on its website.

The reader can use Google translate on the text, I have tried to translate a few paragraphs:


Stolen info SBM Offshore about $ 250 million fraud and involvement top executives

On the internet circulates a very detailed document that gives information about large scale alleged bribes by Schiedam (Netherlands) based Billion Euro company SBM Offshore, a supplier to the oil and gas industry. SBM confirms to Quote that this information comes from within the company. "It was stolen by a former employee who wanted to blackmail us."

A former employee of SBM has a large amount of information about possible fraud cases by employees of SBM Offshore on the Internet, which contains bribery of officials in Angola, Equatorial Guinea (both located in West Africa), Brazil, Malaysia, Iraq, Kazakhstan and Italy. Also, excerpts from transcripts of recordings published showing that (members of) the Board of Directors and (members of) the Board of Trustees for many years are aware of the malpractices. The top of the company would deliberately try to conceal these cases. In total, between 2005 and 2011, $ 250 million is spent on bribes.

The spokesman of SBM lets Quote know that this information actually comes from the internal investigation that runs inside the company. "This information has been obtained illegally by an angry former employee who tried to extort SBM. We are engaged in legal action against this person. This information is placed out of context. As the investigations of the American and Dutch judiciary are still running, with which we are fully cooperating, we can not further give any information."

 The text can be found in the following Wikipedia article, an old revision dated October 18, 2013.

The link to Malaysia can be found in the following paragraph:


"4.1 MALAYSIA - Payments to Barnado Limited and Delcom Limited totalling approximately US$10,000,000, paid on (ie. by way of bribes) to “MISC” for the Kikeh FPSO (leased to US oil company Murphy)."


If these allegations by the formed employee are indeed true or not, I guess we have to wait until the investigations by the relevant authorities are finished.

More information about this project can be found here:

FLOATING PRODUCTION STORAGE AND OFFLOADING (FPSO)

"The Kikeh field is located 120km northwest of the island of Labuan, offshore Sabah, East Malaysia in water depths of around 1,300m. Murphy Sabah Oil Company operates Kikeh on behalf of partner Petronas Carigali.

The FPSO Kikeh will be located in 1,350m of water. It will be owned by MDFT Labaun and operated by MDPX Sdn Bhd, two joint ventures between SBM and Misc Berhad. The converted tanker was built in 1974 It has an overall length of 337m a breadth of 54.6m and a deadweight of 273,000t. It has a storage capacity of two million barrels."
 

Weekly roundup

Several interesting articles in Singaporean newspapers:

[1] Article about Claire Barnes and the Apollo fund managed by her, one of the best performing funds in Asia. Warren Buffett often warned investors in Berkshire Hathaway that the performance of the previous years would not be able to sustain. This humility is typical of good fund managers and Claire Barnes is no exception, she explains the stellar performance of her fund for a good part on the initial years which coincided with  the Asian crisis, when some unbelievable bargains were available. Peter Lynch was a successful fund manager for Fidelity, but he was very much disappointed once he found out that investors on average had actually lost money in his fund. The reason was that much more money was invested when the index had gone up a lot, and money was withdrawn when the index had gone down a lot. The Apollo Fund has closed on occasions, when Claire Barnes had problems finding value. This seems to make perfect sense.


[2] Article about AirAsia X CEO Azran Osman Rani and his entrepreneurial background. Great story, also touching on his twitter against racism. I have issues with Corporate Governance in both AirAsia and AirAsia X and have written several times about them, but I do admire the people who run these businesses.


[3] Article about BFM 89.9 founder and CEO Malek Ali and his entrepreneurial journey, another great story. However, also a less great paragraph, Malek was summoned to Malaysia's Communications & Multimedia Commission (MCMC) where he had to explain why his radiostation invited someone from the Economist Intelligence Unit (EIU) to discuss its Global Democracy Index. More about this index can be found here and here. Malaysia was classified as a "flawed democracy", which is less bad than it sounds, it means Malaysia is in the 2nd category out of 4, and ranked 71st out of 167 countries. Apparently the results from the EIU were deemed to be not favourable enough for the powers that be, hence the need to call Malek, a very worrisome development.


[4] Article in The Business Times about the important role that short sellers play in governance, highlighting the case of China Metals Recycling (CMR), which is the latest China company to come under official scrutiny amid allegations involving inflated accounts:

"What's interesting from a markets and governance perspective is that the allegations about CMR's finances first surfaced in January when US short-selling firm Glaucus Research Group published a report recommending a "strong sell" because, among various reasons, CMR's claim (on its website) that it is China's largest scrap metal recycler was a "lie" and that "many of the company's key financial and operational metrics deviate so significantly from other scrap metal recyclers that its reported performance defies credibility".

"Those which act responsibly like Glaucus by providing full disclosure can complement regulatory efforts and should be viewed as an important component of the governance framework."


[5] Everything was going nicely with MISC, minority investors rejected the low offer from PETRONAS (a nice and rather rare victory for shareholder activism in Malaysia) and the share recovered to a price that was higher than the offer price (again, indicating that the offer was really not sufficient). But things have changed quickly, PETRONAS wants to ship the liquid gas themselves. With PETRONAS controlling MISC (whose main source of input is the transport of liquid gas), a clear conflict of interest situation will be created. I hope that PETRONAS will reconsider their plans, this new development doesn't sound like a good idea at all. KiniBiz's "Tiger" asked the following pertinent questions:

• Is it Petronas’ intention to deliberately undermine MISC’s prospects so that the price can be depressed for another future takeover offer by Petronas?

• If it is, is it the right way for Petronas to behave as a national oil corporation which has or should have high standards of corporate governance?

• Is this what we can expect from Petronas in terms of its other listed subsidiaries — go to the market, get investors, try and privatise for a low price and if that fails, deliberately sabotage that listed company so as to mount another takeover on it?

• Is this an act of vengeance that the misguided management is trying to impose on minority shareholders for rejecting the offer, even if the move will ultimately undermine and perhaps even destroy its very own subsidiary?


[6] My article "Maemode: accurate predictions by Ze Moola, but why did nobody notice?" received quite a lot of web traffic. I uncovered some more issues and hope to revisit this subject in the future in more detail.


[7] There has been speculation in the press of an IPO of POSH Semco, a subsidiary of POSH in which Maybulk has invested close to RM 1 Billion. I don't like to react on speculation (which has been proven so often to be wrong), I just like to point out that POSH itself (the mother company of POSH Semco) was supposed to be listed within 5 years, a term that will expire before the end of this year. Also, there is still a put option by Maybulk to sell back their stake in POSH at a premium of 25% to their purchase price. I have written many times about the extremely pricey purchase of POSH by Maybulk during the depth of the global crisis, especially regarding the questionable valuation report and the biased independent report. I hope that the minority investors are given the right to decide if the put option will be exercised or not, and that the majority investors will abstain from voting, although I doubt this will actually happen.


[8] And lastly some good news reports KiniBiz, which can be seen as another victory for shareholder activism in Malaysia:

"Final ‘voluntary termination’ payments were issued today in a media conference called by the management company of the beleaguered Country Heights Grower Scheme.....

Today’s payment by the management company of the scheme, Plentiful Gold-Class to CIMB Commerce Trustee comprised a 90% capital refund of RM182.9 million, unclaimed monies with regard to the first 10% capital refund and a goodwill payment of RM25 million by Lee Kim Yew, the founder and head of the Country Heights Grower Scheme."

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.

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?

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.