Sime Darby's E&O bid poses policy dilemma (2)

On the MalaysianInsider website much more information, a good article:

KUALA LUMPUR, Sept 9 — Securities Commission (SC) chairman Tan Sri Zarinah Anwar is under pressure to investigate her husband, Datuk Azizan Abdul Rahman, for insider trading over conglomerate Sime Darby Bhd’s recent purchase of 30 per cent in property developer Eastern & Oriental Bhd (E&O).

There is also pressure on Sime to make a mandatory general offer (MGO) to E&O’s minority shareholders as the plantations-to-property group had paid a 60 per cent premium for the 30 per cent stake bought from three shareholders. Azizan, who is E&O chairman, did not sell to Sime but has been reportedly buying shares in the past few months.

The SC has already said it is investigating the deal although it did not note the relationship between Zarinah and Azizan.

“We are also examining the circumstances surrounding the transaction for any Takoever Code implications. Our course of action will be based on our findings,” SC said in an e-mail response to local newspapers on Wednesday.

Minority Shareholders Watchdog Group (MSWG) chief executive officer Rita Benoy Bushon had also questioned the deal and asked if there would be an MGO although the share purchase was below the 33 per cent threshold to trigger a mandatory buy.

“Where does this leave the minority shareholders? Is it fair to them?

“We believe that in the circumstances, the Securities Commission should investigate whether the other conditions for an MGO have been fulfilled,” Bushon wrote in The Star newspaper yesterday.

Bursa Malaysia filings showed that shareholders and board members of E&O and investment firms had been buying up E&O shares ahead of the deal being announced on August 28.

Just before the Hari Raya break, Sime Darby announced it wanted to buy a 30 per cent block (involving 273 million shares and 60 million irredeemable convertible secured loan stocks) in E&O at RM2.30 per share or a total of RM766 million from three vendors — E&O managing director and founding member Datuk Tham Ka Hon, Tan Sri Wan Azmi Wan Hamzah and Singapore-listed GK Goh Holdings Ltd.

The RM2.30 offer price represented a 60 per cent premium to E&O’s then market price.

The filings revealed that GK Goh bought shares totalling 1.25 million shares from the open market for three consecutive days starting August 10. Others buying up E&O shares in August ahead of the deal being announced include ECM Libra Financial Group Bhd, which acquired 6.16 million shares, increasing its stake by 0.63 per cent amounting to 6.25 per cent in four transactions in August.

Azizan also purchased 100,000 shares on August 12 from the open market, bringing his total purchase to some 450,000 shares from the open market involving five separate transactions from April to August this year.

In a statement to The Star, Azizan said: “With regard to the issues raised pertaining to Sime Darby’s proposed acquisition of a 30 per cent interest in E&O, I would like to highlight that it is a private transaction between major E&O shareholders and Sime Darby.”

“The transaction does not require board approval and, hence, was not discussed at the board level. As such, board members were not privy to the transaction and continued to trade in accordance with the prevailing rules and had made appropriate filings with Bursa Malaysia,” Azizan said in the e-mail response.

Apart from these transactions, three of the transactions were done in July and August. Based on Bloomberg data, E&O saw trading volumes increase drastically in July and August, with the company’s share price hitting an initial high of RM1.70 ahead of the deal being announced. E&O’s share price had been moving upwards since mid-March (RM1.08 on March 16) and closed at RM1.68 yesterday.

“The main sore point is the offer price which amounts to 19 times E&O’s forecast earnings for 2012 and 1.85 times its price-to-book value, where, by comparison, the property sector has an average of 12 times forecast earnings for 2012 and 0.8 times price-to-book value,” Bushon had said in her column in The Star daily.

She argued while the premium could be partially justified since it is a controlling block, “but with a mere 30 per cent stake, the extent of earnings contribution accruing to Sime is merely at the equity-accounting level as an associate, or a mere 0.6 per cent increase to Sime Darby’s profits in 2012 and 2013”.

“So soon after reeling from its recent billion-ringgit losses in its energy division, it is hoped that the board had undertaken all due diligence in this deal,” she added.

I find the statement of Azizan remarkable to say the least: 30% of E&O’s shares changed hand, and the board didn't know about that, they didn 't discuss it? Some members of the board were directly involved in these transactions.

For me, the only solution that I can see is:

  • Sime Darby does the only honourable thing, offers the same price to all shareholders. If the 30% was cheap, then the other 70% is also cheap. Sime Darby has to pay for the mistake they made; it hasn’t been their first and probably won’t be their last.

  • The possibility of insider trading should be investigated in depth, if any doubt at all exists the perpetrators should at least not profit from possible inside information. If they clearly traded on inside news, they should be severely punished.

The issue stays if Malaysia should have somebody for the very important post of Chairman of the Securities Commission, whose husband is often involved in corporate deals, some of which were controversial. In my opinion the answer is simply: "No". The possibility of (perceived) conflict of interest is simply too large to ignore. We need total transparency and confidence in important issues regarding huge amounts of money.