This article first appeared in The Edge Malaysia Weekly on October 22, 2018 - October 28, 2018

PERHAPS the most damning acquisition in recent times by the Federal Land Development Authority (FELDA) is that of a 37% non-controlling stake in PT Eagle High Plantations Tbk from the Rajawali group, the flagship vehicle of Tan Sri Peter Sondakh, supposedly a close associate of former prime minister Datuk Seri Najib Razak.

While Ministry of Finance officials say the acquisition is not worrying as there is put option for FELDA to sell the stake back to the Rajawali group in three years, with 6% interest added on, the manner in which the acquisition was carried out shows utter disregard for principles of good investment, rules and regulations, and corporate governance.

“It actually looks more like a loan than an acquisition,” one market watcher says.

Nevertheless, the deal was concluded by FELDA’s unit, FIC Properties Sdn Bhd, in April last year, which means that there are another 1½ years to go before FIC Properties can transfer the stake back to Sondakh and collect its money.

There were many issues pertaining to the acquisition. This is especially after FGV Holdings Bhd, a 33.67% unit of FELDA, aborted the proposed acquisition of the 37% stake in Eagle High on the advice of JPMorgan and other merchant bankers.

Furthermore, under FGV’s instructions, KPMG issued a report in July 2015, dubbed Project Sunshine, saying that it had concluded due diligence on Eagle High and had cast doubts on the valuation of the Indonesian company, priced then at US$680 million, for FGV to acquire a 37% stake.

The report also questioned Eagle High’s net assets, potential dividend leakages, financial performance, cash flow constraints and overstatement of land size.

KPMG even went so far as to suggest that FGV get legal advice to ascertain whether certain schemes undertaken by Eagle High were in compliance with relevant laws and regulations in Indonesia.

But the strange thing is that while the report was released in July 2015, FGV only announced in end-December 2016 — 17 months later — that “the company (FGV) and the vendors have mutually agreed to terminate all negotiations on the proposed acquisition with immediate effect”.

Then, a mere four months later, FELDA bought into Eagle High, acquiring the 37% stake after obtaining an unconditional and irrevocable corporate guarantee from the ministry to issue bonds worth US$551.85 million.

Shouldn’t FELDA, as a 33.67% shareholder of FGV and which has representatives on its board have known about the KPMG report and the issues at Eagle High?

Also a problem was that Rajawali controlled 74.64% of Eagle High before the sale of the 37% block to FIC Properties. Thus, Rajawali and Sondakh remained the controlling shareholders of Eagle High with 37.64% equity interest.

This begs the question why FIC Properties would part with such a huge sum of money and pay a high premium and not control the company. In most cases, a shareholder buying a 37% stake would want to chart the direction of the company, instead of leaving it to the people who have left it bleeding red ink.

Eagle High seems likely to remain in the red for its fourth straight financial year as it had reported losses in its six months ended June 30, 2018.

Also the price tag for the acquisition — US$505.4 million (RM2.26 billion then) — could not be justified as an offer of US$505.4 million for a 37% stake would value Eagle High at IDR580 per share (Eagle High’s stock was trading at IDR298 then).

Things are getting worse now. Last Thursday, Eagle High closed at IDR202, giving it a market capitalisation of US$419.15 million, which means that FIC Properties’ 37% stake is worth US$125.74 million, down about 75% from the US$505.4 million it paid.

Furthermore, a document obtained by The Edge — in the form of a letter written by former FELDA director-general Datuk Hanapi Suhada to the secretary of the Strategic Investment Division at the Ministry of Finance, Datuk Ahmad Badri Mohd Zahir — indicates that the government was well aware that the acquisition of the Eagle High stake was indeed risky.

In the letter dated Oct 27, 2015, Hanapi had sought an “unconditional and irrevocable corporate guarantee” from the ministry to issue bonds worth US$551.85 million via Bank of America, which, in turn, would be used to buy exchangeable bonds valued at US$551.85 million from PT Rajawali Capital International. The letter states that the “exchangeable bond proposed by Rajawali is high-risk for both FIC and FGV, as the two, FIC and FGV, risk not getting back their investment and interests”.

“To lessen the risk, Rajawali should pledge as guarantee its entire holding in Eagle High Plantations to FIC and FGV,” it added.

But this was never done.

It was also an issue that Eagle High was only required to be Roundtable on Sustainable Palm Oil (RSPO)-compliant three years after the investment, that is, in April 2020. The RSPO is a set of principles and criteria members must comply with in order to be certified as producing sustainable palm oil.

To put things in perspective, Eagle High had suffered losses in the past three financial years. For the financial year ended December 2017, it incurred a net loss of US$13.9 million from US$227.6 million in revenue.

FELDA’s argument that it will not be able to acquire such a large asset has not struck a chord with the market. Eagle High has about 150,000ha with an additional 170,000ha not cultivated as yet. Thus, there is no justification for the massive premium.

There is also talk that units of FIC Properties — such as Eagle High — will be transferred to Ministry of Finance, but whether this will happen is not clear. The Edge understands that the Ministry of Finance has conducted due diligence on Eagle High with a view of FELDA passing the 37% block to the government, but the deal has yet to be concluded.

But the question remains, why did FELDA buy into Eagle High?

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