Cloud over Sime's E&O stake darkens

Below article is from the Singapore Business Times:

Collaboration deal sparks question of effective control

By S JAYASANKARAN IN KUALA LUMPUR

in Kuala Lumpur NEW questions are surfacing over conglomerate Sime Darby's purchase of a 30 per cent interest in property developer Eastern & Oriental (E&O) a month ago.

Already, there is pressure building for Sime to make a mandatory general offer (MGO) to E&O minority shareholders as the plantations-to-property group had paid a 60 per cent premium for the 30.2 per cent stake it bought from three shareholders.

The sellers are E&O chief executive Tham Ka Hon, businessman Wan Azmi Wan Hamzah and Singapore-based broker GK Goh. Sime paid the three RM766 million (S$311 million).

The Securities Commission (SC) has said that it was investigating the deal. 'We are also examining the circumstances surrounding the transaction for any Takeover Code implications,' the SC said in response to local media three weeks ago. 'Our course of action will be based on our findings.'

It isn't clear when its findings would be disclosed. The ramifications of the SC decision could be serious. If it finds for E&O minorities, Sime would have to fork out RM1.8 billion for the remaining 70 per cent. If acting-in-concert is proved, then all parties - Sime and the three sellers - would have to fund the GO.

The acting-in-concert theory came about because of the high price paid. This angle has been vigorously denied by Sime chief executive Bakke Salleh, Mr Tham and Mr Wan Azmi.

Mr Wan Azmi also debunked the theory that Sime might not have acted within the spirit of the law. 'If a buyer buys less than what the code defines as the trigger, do we always have to assume that the intentions of the code have been violated?' Mr Azmi told The Edge weekly. 'That would be rather disingenuous.'

Analysts have begun turning their attention to the collaboration agreement between Sime and E&O, an agreement signed the same day as the sale and purchase agreement. This is tied to the Takeover Code which, while it specifies 33 per cent as the trigger point for an MGO, also permits MGOs for purchases of less than that if it can be proven that it comes with effective control of the company so purchased.

Sime does not appear to control E&O. It has no directors on the firm's board and E&O's management remains the same with Mr Tham agreeing to remain CEO for three years, the same period that the collaboration agreement lasts.

The collaboration agreement, which was announced to the stock exchange by Sime, seems innocuous enough. It calls for the sharing of knowledge and expertise, the leveraging of mutual competencies and, where agreed, the joint exploitation of economic opportunities. It also says that the agreement 'shall be in full force and effect' for a period of three years.

'What does that mean?' asks an analyst. 'Does that mean E&O can still do a joint development with, say, SP Setia or anyone it likes? Or do they, under the collaboration agreement, have to ask Sime's permission first? If so, who controls whom?'

These questions are likely to be asked at an extraordinary meeting of E&O shareholders in two weeks. It was called for by investment bank ECM Libra which has, directly and through the pension funds it manages, almost 11 per cent of E&O stock. According to news reports, the investment bank wants two ECM-sponsored directors appointed to E&O's board.

Mr Bakke of Sime has remained open to the possibility of a general offer. 'At an appropriate time, we will consider a GO,' he told The Star newspaper. 'It could happen sooner or later but that will be a business call.'

Most analysts have taken that to mean that the conglomerate might consider it after six months - the period after which the highest-transacted-price clause no longer holds. That would mean Sime could make a voluntary general offer for E&O at below RM2.30, the price that it paid the three sellers.

It could, for example, make a bid at RM1.80 and substantially lower its average price. E&O shares currently trade at RM1.45.