This article first appeared in The Edge Malaysia Weekly on July 16, 2018 - July 22, 2018

THE RM1.37 billion acquisition of Aspion Sdn Bhd that was meant to cement Top Glove Corp Bhd’s leading position in the rubber glove industry has turned sour, merely three months after the completion of the deal.

The market is spooked by the ongoing legal wrangling, to put it mildly, with most players and analysts unsure as to what exactly is going on.

“It is unexpected … there was so much enthusiasm, so much promise initially but now, it has become ugly. No one understands enough to guess the outcome,” says a market watcher.

To recap, on July 6, Top Glove announced the commencement of legal proceedings against Singapore-based Adventa Capital Pte Ltd, individuals Low Chin Guan and Wong Chin Toh, and ACPL Sdn Bhd — a wholly-owned subsidiary of Adventa Capital. Low and Wong are directors of Adventa Capital and ACPL.

The case against Adventa Capital is also being heard in the Singapore courts because of an arbitration clause in the sales and purchase agreement (SPA), which requires allegations against Adventa Capital to be scrutinised in the Singapore arbitration courts.

Top Glove is claiming losses and damages amounting to RM714.85 million for alleged overpayment for Aspion, alleged shortfall in inventory recorded in Aspion’s books versus what was verified to be in existence, and alleged non-existent assets and expenses in relation to fixed assets that have been capitalised instead of being expensed when incurred.

In its lawsuit, Top Glove alleges fraudulent misrepresentation by Adventa Capital, Wong and Low, which “induced” the glove maker to acquire Aspion at an inflated price.

Adventa Capital is the investment holding company that held Aspion’s subsidiaries, which are involved in the manufacture of disposable sterile surgical gloves, and medical examination and protection gloves.

For a clearer picture, Adventa Capital’s shareholders are Low and Safe Hands Investments Pte Ltd, which is ultimately controlled by private equity fund Southern Capital Group Pte Ltd, whose chairman is Tan Sri Tan Teong Hean.

What observers want to know is, why has not Top Glove opted for the path of least resistance — settling the matter out of court? After all, they say, the glove maker was dealing with a reputable private equity fund, of which Tan was the chair.

This would have spared its share price the rout last Monday, when it lost 24.55% or RM2.97 to close at RM9.13 at the end of the day. Although the stock had recovered somewhat last Friday, closing at RM9.91, it was still far off its peak of RM12.30 on July 5.

The legal proceedings have also resulted in several analysts downgrading their call on Top Glove as they believe the two-year profit guarantee promised in the SPA will not materialise, given the current state of affairs.

Observers also wonder why Top Glove sought to take Low and Wong to court as well, given that they were only functioning as representatives of Adventa Capital.While Low is a shareholder, he only owned 30% of Adventa Capital.

Furthermore, in Wong’s affidavit, it is stated that the SPA provides for an arbitration of disputes to take place in Singapore, which questions Top Glove’s preference to go to court over the issue.

It is also interesting to note that Top Glove’s statement of claim indicates that the auditor involved in the due diligence prior to the acquisition highlighted two issues based on the information provided in the virtual data room (VDR).

Access to the VDR was given to Top Glove by Adventa Capital on July 31, 2017.

One of the issues raised by the auditor, KPMG, is a “higher risk of non-collectability of receivables aged more than 90 days”. The data provided at the time showed that 14.8% or RM15.9 million of Aspion’s net receivables were aged more than 90 days as at April 30, 2017.

KPMG also recommended that the acquirer conduct a physical stock take of Aspion’s inventory because out of its works in progress of RM64.2 million, RM22.2 million worth were aged more than six months.

Following meetings between its representatives and the defendants, Top Glove claimed that it saw no need for a physical stock take after representations by the defendants that Aspion had written off RM13.8 million of inventory in September 2017 and would write off a further RM17.8 million worth of inventory for FY2017.

Top Glove mentions in its statement of claim that it conducted an inventory count on March 29 and 30, April 24 to 27 and May 22 to 25, and extracted a listing from Aspion’s general ledger showing the ageing of inventory as at April 30 and Sept 30, 2017.

Top Glove says in its statement of claim that it was after the completion of the acquisition that it discovered the issues of non-existent inventory, inventory in an unfavourable condition and decommissioned production lines, among others.

Meanwhile, in the affidavit filed by Wong on behalf of ACPL, it is stated that Top Glove had deployed a quality assurance team of 50 people to perform a specific quality assessment stock take and inventory count in March 2018 at three of Aspion’s plants in Kulim, Kota Baru and Kluang.

“Top Glove did not express any objections or raise any issues in relation to the inventory in these three plants upon the completion of the stock take,” reads the affidavit.

Top Glove is claiming that the alleged manipulation of Aspion’s financial statements by recognising non-existent stock and obsolete stock as inventory had artificially inflated Aspion’s assets and profitability.

This, it says, resulted in the company agreeing to pay far more than what it would have had it known the truth. It also says Adventa Capital, Low and Wong made the representation that the target profit after tax of RM80.9 million in FY2018 and RM108.3 million in FY2019 was achievable despite knowing otherwise.

The defendants have denied all the claims made against them.

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