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This article first appeared in The Edge Malaysia Weekly, on March 7 - 13, 2016.

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Whatever the merits of Felda Global Ventures Holdings Bhd’s (FGV) proposed RM976.25 million purchase of a Cayman Islands-incepted company that is involved in the edible oils business in China, it got off to a poor start.

Despite FGV’s 12-page announcement on Feb 26, Bursa Malaysia listed 15 additional questions on March 2 that the company needed to answer within one market day on the proposed purchase of a 55% stake in Zhong Ling Nutri-Oil Holdings Ltd. Zhong Ling’s units refine and distribute peanut and other edible vegetable oils in China.

In its reply to the queries on March 3 — four market days after its initial announcement — FGV clarified that no deposit was paid on the nearly RM1 billion purchase consideration.

This must come as a relief to investors, given the controversy over the US$174.5 million (RM656 million) deposit, or just over 25%, on the US$680 million (RM2.5 billion) proposed purchase of 37% of PT Eagle High Plantations Tbk last year, which is still pending completion. Shareholders who questioned that deal, which is currently being renegotiated, included the Employees Provident Fund.

In its March 3 reply, FGV explains the difference between the amount it agreed to pay Zhong Hai Investment Holdings Ltd and the remaining 14 vendors for the 55% stake in Zhong Ling.

“Among the vendors, it was agreed that Zhong Hai has a better valuation because all share adjustments relating to the variances in respect of the audited PAT for FYE 2014 and 2015 will be borne by Zhong Hai. In addition, in the shareholders’ agreement to be entered [into] between all parties, any variances to the profit guarantees for the next three financial years 2016, 2017 and 2018 will also be borne by Zhong Hai,” FGV says in the reply.

The exact size of the profit guarantee for FY2016 to FY2018 is unknown but this guarantee is worth RM130.35 million, based on the price difference of the 26.4% stake FGV is buying for RM537.05 million from Zhong Hai Investment and the RM439.2 million for the 28.6% stake from another 14 vendors that collectively will still own 23.3% in Zhong Ling post-deal.

Zhong Hai Investment would still have a 21.7% stake in Zhong Ling post-deal if no adjustment shares are issued to FGV for FY2014 and FY2015 for any profit shortfall.

The adjustment clause on the final purchase price notwithstanding, the fact that Zhong Ling’s accounts have not been audited since 2013 is one reason analysts have reservations about the deal.

There are other questions over the acquisition of a peanut oil refiner and distributor by the world’s third largest oil palm estate operator.

“FGV rationalises the acquisition as a strategic fit, given ZL’s established operations with a proven track record in China, providing a platform for FGV’s future growth into this fast growing market,” Maybank Investment Bank Research analyst Ong Chee Ting says in a Feb 29 note entitled “Surprise downstream purchase”.

“But it is unclear why FGV chose a peanut oil manufacturer as a platform into China as integration and synergy may take time. Assuming FGV overcomes the integration challenges and derives synergies, the acquisition could add RM57million to its FY17 net profit (+15%) based on the average PATMI of Zhong Ling over the past three years net of funding cost for the acquisition.

“On paper, valuation appears decent at 9 to 12 times 2013-15 PER and three times 2013 audited NAV. However, we believe China’s consumer market is full of challenges despite its potential. We maintain a ‘sell’ and target price of RM1.30 on 16 times 2016 PER,” Ong adds.

Another seasoned plantation analyst points out that there are already two big edible oils players in China with over 60% market share — Singapore-listed Wilmar International Ltd (Arawana, Orchid, Liyu) and state-owned Cofco Group (Fortune, Four Seas). Wilmar, which is about 18%-owned by billionaire Robert Kuok’s flagship PPB Group Bhd, contributes over 70% to the latter’s profits.

According to Agriculture and Agri-Food Canada’s global analysis report dated January 2014, citing Euromonitor data, Quanzhou Jin Hua Oil Co Ltd’s (one of Zhong Ling’s five wholly-owned subsidiaries) “Tuo Niao” (Ostrich) oil had 0.7% market share in 2013 and was 14th among 23 retail cooking oils ranked. Wilmar’s Arawana was No 1 with 33.7% market share while its Orchid brand had a 2.1% share and Liyu, 1.4%. Cofco’s Fortune had 12.4% and Four Seas, 2.7%.

According to FGV’s Feb 26 announcement, the Tuo Niao brand contributes almost 70% to Zhong Ling’s total sales and has a 10% market share.

On a question about Zhong Ling’s prospects, FGV said last Thursday that the company has 135,000MT of refining capacity in Nantong city in Jiangsu province and 45 million packing capacity that can serve 80 million people in the province. It also has over 100 customer bases and a network of 60,000 retail outlets covering five southeast coastal provinces — Fujian, Jiangxi, Guangdong, Zhejiang and Jiangsu.

The announcement also says the deal is expected to be completed by end-March and is not subject to FGV shareholders’ approval.

Nonetheless, FGV could well have to ask its shareholders for permission to purchase Zhong Ling. In its reply to Bursa, FGV says the highest percentage ratio of the deal is 81% of its unaudited accounts for FY2015 and FY2014 management accounts. The lowest percentage ratio is 24%.

According to listing rules for a non-related party transaction, a company would need to seek shareholders’ approval if the size of the transaction is 25% or more than the relevant benchmarks, including total assets, net profit and total equity, if it involves new share issuance.

This has not been made clear at the time of writing. If shareholders’ approval is indeed required, it will give them a chance to seek further clarification. But before that, FGV would win more points if more information were provided about the deal and the acquisition target.

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