Frankly Speaking

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Against the spirit of non-disclosureLast week, Hong Leong Bank Bhd told The Edge Financial Daily that it may request EON Capital Bhd to make further provisions before the proposed acquisition of the latter’s assets and liabilities is finalised, whilst maintaining its offer price of RM7.30 per share or RM5.06 billion in total.

The bank did not disclose more about the provisions but they are believed to be related to loans in the Middle East. It was reported that officials close to EONCap have contended that the bank has provided for these loans in accordance with Bank Negara Malaysia guidelines. However, HLBB is of the view that the provisions are inadequate.

Then on Friday, EONCap announced that it was going ahead with the disposal despite independent financial adviser Credit Suisse saying HLBB’s offer is “not fair from a financial perspective”.

There are a few issues in this entire episode that don’t sit right. Firstly, in a due diligence exercise, parties are bound by a non-disclosure agreement that prohibits the disclosure and misuse of confidential information. Clearly, when HLBB disclosed that it may request EONCap to make more provisions, it goes against the spirit of the non-disclosure agreement. 

Ironically, HLBB said it would not vary the offer price of RM7.30 per share.

What effectively is the message that HLBB is sending? If the deal falls through, what would be the implications for EONCap’s value should it seek other potential suitors?

The other matter relates to the positon of EONCap’s board on the HLBB offer. The board has resolved to table to shareholders for their consideration the proposed disposal at an EGM later, which is something it has consistently said.

The opinion of the board regarding the offer from HLBB would certainly be in the circular to shareholders. That is something that will be closely watched because, apart from Credit Suisse, there is also an opinion from Goldman Sachs that the offer is right.  Is it really Goldman Sachs?Last week, US-based Goldman Sachs Group Inc emerged as a substantial shareholder in MY EG Services Bhd (MyEG) with 5% equity interest or 30.3 million shares.

According to a Bursa Malaysia announcement, Goldman Sachs accumulated the shares on the open market, which could explain the spike in MyEG’s share price. MyEG’s shares have gained about 24 sen, or more than 30%, since late last month. It hit its 52-week high of 66 sen last week. During that period, the company’s stock outperformed the bearish benchmark FBM KLCI Index by some 36%.

Considering Goldman Sachs’ name and reputation, the gains on MyEG are understandable. As a matter of fact, the juggernaut buying into any Malaysian company would pique the interest of the investing community, what more a small-cap stock like MyEG.

But it begs the question: who are the actual owners of the shares? Is it really Goldman Sachs or is the company merely holding or warehousing the shares for another party?

There is a huge distinction between Goldman Sachs actually buying into the company and the fund merely holding the shares for a nominee.

In fact, MyEg is not the first company to have Goldman Sachs as a shareholder. There are a few others. Some investors could assume that Goldman Sachs emerging as a shareholder would be a stamp of approval of the company. But that may not be the case in reality.

Also, Goldman Sachs’ reputation is not as it should be at the moment considering the charges levelled against it by the Securities and Exchange Commission for its role in structuring a mortage-backed security that had all the ingredients to fail.

While Goldman Sachs or other funds do not owe minorities a fiduciary duty, some form of transparency is required to prevent investors from being misled. For starters, it would be good if there is an indication if the shares are held for a third party.
Let’s be open about QIA, MubadalaThe entry of high-profile Middle East funds into the development of government land, such as the old airport in Sungai Besi and Peel Road in Cheras, has raised eyebrows.

While the development plan helps spur economic activities and brings in new money into the country, there is a view that roping in foreign parties to develop prime land belonging to the government is not a good idea. After all, when Singapore auctioned its land, Malaysian companies bidding for it had to pay a high price.

The counter-argument is that Malaysia is not Singapore where property is hot. Having a big fund such as the Qatar Investment Authority or Mubadala of Abu Dhabi as a partner of 1Malaysia Development Bhd (1MBD) in the development of the project helps to raise the bar. Also, more importantly, the funds should have the reach to bring in high-net-worth individuals to take up the properties in these areas.

That said, the entire process involving the development of public land should be conducted in a transparent manner. The lead developer and driver of the development is 1MDB. Since it is funded entirely by a government-guaranteed bond issue of RM5 billion, it effectively is a government-backed entity. Hence there is no real relevance to its entry price.

But the same does not apply to its partners. The partners in the development of Sungai Besi airport are said to be the Qatar Investment Authority and Lembaga Tabung Angkatan Tentera. As for the Peel Road land, 1MDB’s partners are a national real estate agency and Mubadala.

The question is, what is the cost of entry of QIA, Mubadala or LTAT into the joint venture with 1MDB? Do QIA and Mubadala have local partners? And if they do, who are these people and how were they selected?

It’s the transparency and scrutiny of such matters that are important and will determine if 1MDB is really maximising value for the government.
This article appeared in Corporate page of The Edge Malaysia, Issue 807, May 24-30, 2010