Smelling a rat

This hottest corporate story at the moment is the Sime Darby acquisition of Eastern and Oriental Bhd (E&O). The plantation-based conglomerate took 30% of the Penang based property developer for RM 776 million. The sellers are Managing Director and founding member Dato’ Tham Ka Hon, former property developer and recently back in the ‘blue chips’ corporate scene as Malaysia Airlines director Tan Sri Wan Azmi Wan Hamzah and Singaporean group GK Goh holdings.

The Star’s take on this, yesterday:

Monday September 5, 2011

E&O deal hogs limelight

Sime has got the biggest chunk of E&O, but was the price worth it?

THE pundits have it. For the last month or so, the rumour mill was working overtime around Eastern & Oriental Bhd (E&O), the luxury lifestyle property developer, that a merger or acquisition was in the works.

First came the persistent speculation that SP Setia Bhd would merge with E&O, which was soon quashed by SP Setia. Then last week – quite out of the blue – Sime Darby Bhd announced it was acquiring a 30% stake in E&O for a significant premium over the latter’s share price.

In early August, E&O’s shares galloped to a three-year high of RM1.75 on the back of the SP Setia merger rumours, then came down again in line with the global stock slump. Yet, amid the broader market sell-down a few weeks later, its stock again saw aggressive trading, this time from its own shareholders who appeared to be upping their stake.

The notable ones included GK Goh Holdings Ltd, a substantial shareholder of E&O, and Datuk Azizan Abd Rahman, a director of E&O. According to shareholder changes filed with Bursa Malaysia, GK Goh had bought 1.25 million shares in three days, raising its stake to 11.6%, while Azizan acquired 100,000 shares.

Coveted land: Phase one of Seri Tanjung Pinang in Tanjong Tokong. A second phase comprising two islands of 740 acres of land will be reclaimed around the area next year.

The upward trend in E&O’s share price can be observed since Aug 24, from RM1.43 to Friday’s close of RM1.60, an 11.9% increase.

The deal with Sime Darby, which E&O called a “milestone” development, raised more than a few eyebrows about why such a high price was paid. The share sale agreement is for Sime Darby to acquire 273 million shares in E&O and 60 million irredeemable convertible secured loan stocks, representing a 30% equity interest, for RM766mil cash.

The sale price works out to RM2.30 per E&O share, which is a 58.6% premium over the stock’s pre-suspension price of RM1.45. Sime Darby came out in defence of its purchase, saying the RM2.30 was actually a 20% discount to E&O’s estimated realisable net asset value of RM3.2bil or RM2.88 per share.

Upon completion of the deal, slated for Sept 9, 2011, Sime Darby will be the single largest shareholder of E&O.

E&O’s largest project is the 980-acre Seri Tanjung Pinang seafront development, a coveted address in Penang.

To recap, the 30% block in E&O was acquired by Sime Darby from three substantial shareholders: E&O managing director and founding memberDatuk Tham Ka Hon, Tan Sri Wan Azmi Wan Hamzah and Singapore-listed GK Goh.

The trio’s collective 41.7% shareholding in E&O will be diluted to 11.5% post-acquisition.

Tham, previously the largest shareholder with 15.7%, will end up with a 5.1% stake while Azmi and Goh will have 3.5% and 2.9% respectively.

A sore point with analysts is the high price paid for E&O. TA Research said the price was 19 times E&O’s forecast earnings for 2012 and 1.85 times its price to book value based on consensus estimates. By comparison, the property sector has an average of 12 times forecast earnings for 2012 and 0.8 times price to book value.

Kenanga Research also noted that since Sime Darby was expected to equity account E&O’s earnings on an associate level, that would only translate to a meagre 0.6% increase to Sime Darby’s profits in 2012 and 2013.

It suggested that management might have been better off using the RM766mil to expand its plantation land or motor segment in China.

A local broker, however, had a more pragmatic view, saying that although Sime Darby was keen to venture into high-end development, it did not necessarily want to obtain everything at one go via a general offer, which would have been a much riskier proposition.

“Furthermore, E&O’s shares in the open market are quite fragmented and not very liquid, making the task of acquiring 30% quite cumbersome and time-consuming.

“By getting the substantial shareholders to agree on a share sale proper, Sime Darby avoided facing a hostile takeover situation,” she said.

In terms of mutual benefits, Kenanga pointed out that phase two of the Seri Tanjung Pinang development might have factored strongly in the deal.

The project, estimated to have a reclamation cost of between RM3.2bil and RM3.5bil and a gross development value of RM9bil to RM10bil, could do with the financial muscle of a company like Sime Darby.

***********************

The question now lurks amongst the analysts; will there be a mandatory general offer for the minority shareholders with this Sime Darby take control of E&O:

Tuesday September 6, 2011

Will SC require general offer on remaining shares of E&O?

By RISEN JAYASEELAN and JOHN LOH
johnloh@thestar.com.my

PETALING JAYA: Questions have been raised as to whether Sime Darby Bhd will be required by the Securities Commission (SC) to launch a mandatory general offer (MGO) for the remaining shares in Eastern & Oriental Bhd (E&O).

This stems from the recent announcement by Sime Darby that it was buying a 30% stake in E&O from a group of shareholders at a price that worked out to a 60% premium to market at the point of the announcement.

While the Takeover Code states that an MGO is only triggered by a 33% or more change in shareholding, there are other instances in which an MGO can be required by the regulator.

According to Para 6.2 of Practice Note 9 of the Takeover Code 2010, the SC has the right to consider all surrounding circumstances to deem if control has been passed to a new party, thereby mandating the new party to launch a general offer.

Among the specific criteria laid out in Para 6.2 is “the consideration for the acquisition of the voting shares” in other words, the premium to market that was paid for those shares.

Other criteria that will be looked at include changes to the composition of the board and to the business of the target company.

A corporate lawyer explained: “Under this provision, acquisition of voting shares higher than the fair value or market price of the voting shares may tend to suggest that the acquirer has obtained control of the company.

“Ultimately, the SC would need to be satisfied that all the evidence gathered demonstrates that the vendor is acting in concert with the acquirer such that the acquirer could exercise control, which is equivalent to having more than 33% in the company and which in turn requires it to conduct an MGO.”

Just before the Hari Raya break, Sime Darby had announced it was acquiring a 30% block of E&O at a price of RM2.30 per share when the market price of those shares was RM1.45. The deal is scheduled to be completed this Friday.

Sime Darby is set to acquire 273 million shares in E&O and 60 million irredeemable convertible secured loan stocks, representing a 30% equity interest, for RM766mil cash.

When the deal is done, Sime Darby will be the single largest shareholder of E&O.

The vendors of the block are E&O managing director and founding member Datuk Tham Ka Hon, Tan Sri Wan Azmi Wan Hamzah and Singapore-listed GK Goh Holdings Ltd.

E&O’s share price has risen steadily since the acquisition was announced, closing yesterday at RM1.67 just three sen short of its three-year high of RM1.70 at the peak of the rumours about its supposed merger with SP Setia Bhd.

The most recent uptrend in E&O’s share price began since Aug 24.

Just two weeks prior to that, several shareholders of E&O had raised their stakes in the company. GK Goh, on three consecutive days, increased its stake to 12% while Datuk Azizan Abd Rahman, a director of E&O, purchased 100,000 shares.

However, it should be noted that the possibility of triggering the MGO would not arise if the vendor of the shares did not hold any more shares in the target company.

Such was the case of Khazanah Nasional Bhd‘s divestment of its 32.2% stake in Pos Malaysia Bhd. As Khazanah did not own shares in Pos after the divestment, the buyer could not be deemed to be in control of Pos.

In Sime Darby and E&O’s case though, all three vendors of the 30% block will still hold a collective 12% stake in E&O post-transaction.

In an interview with a business weekly, Sime Darby denied any collusion with the vendors of the block. As at press time, the SC had not replied to queries from StarBiz.

***************

The dust of the last Sime Darby corporate deal boo-boo has yet to settle. And yet, this quickly decided deal. Our corporate scandal analyst blogger Another Brick in the Wall says this over priced deal has indirectly something to do with the ‘notorious’ SC Chairman Tan Sri Zarinah Anwar.

One interesting point is that the deal was brokered by non other than CIMB. It is the same financial institution which serve as an ‘adviser’ to a highly controversial corporate deal a month ago, where Khazanah Holdings Bhd. traded of 20.5% of Malaysia Airlines’ shares for 10% of Air Asiaand had to further pay for 10% Air Asia X’s shares for an ‘undetermined price’. This explains for the ‘collaboration agreement’.

As usual, CIMB would be interested to hive off deals that were on the plate and since SP Setia and ECM Libra already shown interests in this, probably Dato’ Seri Nazir Razak wanted to make a quick strike with his “i-Banker” charms to convince Sime Darby to take this up in a very short time. Probably there is a rat in there somewhere.

Our concern is the suspicion of the more notorious corporate personality Kalimullah “Riong Kali” Hassan’s dirty hands in this deal. Since May this year, ECM Libra has been mopping up E&O shares.

The Edge wrote this on 11 May 2011:

ECM Libra surfaces in E&O

Tags: E&O | ECM Libra Financial Group Bhd | Terry Tham

Written by Jose Barrock

Wednesday, 11 May 2011 12:18

KUALA LUMPUR: ECM Libra Financial Group Bhd has emerged as a substantial shareholder in property developer Eastern & OrientalBhd (E&O) after accumulating 42 million shares or a 5.12% equity interest in the company at end-April. In a filing with Bursa Malaysia yesterday, ECM Libra said it had nudged its shareholding in E&O to 5.35% or 41.41 million shares after mopping up an additional 3.4 million shares on May 9. What ECM Libra plans to do with its block in E&O is not known. In an announcement to Bursa Malaysia, ECM Libra merely said the “shares were purchased from the open market in the normal course of business”. Datuk Terry Tham is the single largest shareholder with a 6.66% stake. Other substantial shareholders are Ample Echo Ltd (6.31%) and Halfmoon Bay Capital Ltd (5.36%). ECM Libra surfacing as a substantial shareholder possibly explains the heightened trading volume in E&O shares from mid-April, which in turn, nudged E&O’s stock to its 52-week high of RM1.54 on May 3. Since mid-April, E&O’s stock has gained more than 20%. It closed down one sen to RM1.44 yesterday. E&O has generated considerable interest lately. In the middle of last month, the Penang-based property developer said it had received approval in principle from the Penang government for phase two of its proposed mixed integrated development on land to be reclaimed in Tanjong Tokong. In 1992, Tanjung Pinang Development Sdn Bhd, a unit of E&O, was granted the exclusive right to reclaim and develop about 980 acres of land in the north-east coast of Penang. To date, E&O has reclaimed  240 acres and is developing phase one of the project called Seri Tanjung Pinang, and has been seeking the state government’s approval to reclaim the balance concession area of 740 acres. ECM Libra ended trading at 90.5 sen, inching up 0.5 sen. *********************

This story about Sime Darby ‘talking for the acquisition’ surfaced at The Edge about a month ago.

It is believed that Riong Kali ‘leaked’ the deal to the press. The intention is very clear. ECM Libra has vested interest in property developer. Probably, they are looking into controlling E&O. The end game of the acquisition is most probably do an asset stripping exercise baloney style, ‘slice-by-slice’.

Of course it was not about value adding into the property development plc. It was never their skill or ability to inject any projects or even any brand to the acquired company. Most probably, it was about getting a quick buck from the garage sale. After all if their adviser is also CIMB, it would be up their avenue for that kind of corporate game.

SC should be looking into this probable insider trading since ECM Libra already got its footing in a few months ago. Then again if the deal is about the involvement of ECM Libra, it is doubtful that SC under Zarinah would actually do anything. Selective prosecution had always been the SC practice under her. For the record, in her first month in SC she ‘closed one eye’ and allowed the shoddy deal of ECM Libra taking over Avenue Capital which involved then Prime-Minister’s-son-in-law Khairy Jamamuddin five and a half years ago.

In the episode of ECM Libra taking over Avenue Capital since May 2006, it is almost obvious that SC Zarinah colluded with Riong Kali via what ABITW call as “Mrs Zarinah”. Please read ABITW’s detailed near obsession in these: SC’s goons dare to Q “Mrs Zarinah”, Filling the missing pieces of “Mrs Zarinah” and Decoy.

Had Riong Kali had his 5.12% plus this round’s 30% holdings of E&O, probably where the company’s assets will end is the next person’s best guesses. He has proven to be a stooge of a regional economic superpower and need not a NOBLE laureate economist to figure out what the would do with prime luxury assets which are landbank parcels.

Unlike Sime Darby which is very active in property development and very much into high value properties, ECM Libra neither posses the necessary competency nor ever got into strategic investment involving land bank assets before. So it suspicious that they would want to control a property development without having an agenda to defragmentise the land banks, even to foreign owners.

Probably, it is better for us all for Sime Darby to acquire E&O instead of allowing the sharks and vultures get a hold on the property development company. Undoubtedly Sime Darby is a much lesser evil compare to the other fellows.

The stench of the rat isn’t so bad now.

*Updated 1030hrs