Monday, October 8, 2012

E&O ... Oct12

The corporate governance issues in relation to the deal continue to simmer.

The transaction was highlighted in CLSA’s CG Watch 2012 report saying the reputation of the SC was hurt due to its handling of the Sime Darby-E&O deal. According to the report, the SC suffered an image issue when it ruled that Sime Darby was not required to make a GO for the remaining 70% stake in E&O.

The report adds that the SC’s reputation was also tarnished because E&O chairman Datuk Azizan Abdul Rahman had raised his personal stake in the developer just before the acquisition.

The SC ruled that it found no evidence Azizan knew about the deal before his purchase and cleared him of any wrongdoing. While this may have been the correct decision, it did hurt the SC’s reputation in the market and raised allegations … about the politically well connected receiving special treatment.

The SC’s ruling on the Sime Darby-E&O transaction is being challenged by a minority shareholder on the property developer.

In late Sept 2012 the Court of Appeal has rejected the SC appeal for the recusal of High Court Judge Abang Iskandar from hearing the case brought by a minority shareholder of E&O against the regulator.

A point of contention in Chow’s case is that the SC task force examining the deal found that Sime Darby was obliged to make a MGO. However, the task force’s finding was later superdeded by SC’s top authority in a major decision.

In the CG report, CLSA opines that Sime Darby may eventually undertake a GO voluntarily to ensure better control and reap synergistic benefits for a merged property decision.

A voluntarily MGO is certainly one way to resolve this whole corporate governance issue. However Sime Darby has not indicated that it plans to do so.

Sime Darby does not need to make an offer price of rm2.30 as the six month period prescribed under the Malaysian Code on Takeovers and Mergers 2010 has elapsed.

Sime Darby could make an offer of rm2.00 which is roughly a 20% premium to the current market price of rm1.70. While this is a fair premium for an MGO, some say it is only fair that they make the same offer of rm2.30.

As the court hearings were going on, it was reported in late Sept 2012 that Tham may exit E&O. But E&O has said that Tham was no plans to retire. After selling a 12% stake to Sime Darby, Tham still holds 5.2% in E&O.

Speculation over Tham exiting is nothing new. In fact, there was heavy speculation before the deal was done that Tham was looking to leave. This was the reason why many bought into E&O as they expected a privatization offer.

Be as it may, some still expect Sime Darby to eventually increase its stake in E&O. The Penang based developer is looking to launch rm2.5 billion worth of properties in Iskandar Malaysia, Penang. Klang Valley and London over the next 18 months from Oct 2012.

An increased stake in E&O will provide Sime Darby with better control. But this may not be in the latter’s plans as yet. Sime Darby has reiterated that it does not intend to increase its stake. It is comfortable with the current (Oct 2012) shareholdings as it wants to learn from E&O with expertise in high end condominiums.

However, there have been no material developments of a JV project between Sime Darby and E&O since the deal was inked in 2011. When asked, Sime Darby told MSWG that they are exploring potential projects.

It was hoping that Sime Darby would have some prime land in KL for E&O to work on. But Sime Darby said that it is not so. This is surprising for a group with such a huge landbank.
It is this disquiet that continues to drive expectations of a GO.

While the CG’s issues remain a thorn in both the SC’s and Sime Darby’s side, no rules were broken. SIme Darby did not cross the 33% threshold and there was evidence of collusion between the shareholders. It remains to be seen how the issue is resolved. At least one positive thing that come out of it is that other companies have not followed suit unit the decision on the case is firmed up.

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