SDarby purchase in E&O: Strange buy and controversial figure

The heat on Sime Darby for the more than RM1.2 billion loss from the unsuccessful foray into oil and gas has not dissipated. The decision by Tun Musa Hitam to remain as Chairman and his restructuring plan is still being questioned.

The former member of the Mile High Club's decision to create the position of Chairmans of business sectors is being seen as politician's move to wash his hands of responsibility.

Sime Darby's decision to file a lawsuit against former CEO Dato Zubir Murshid has invited a counter lawsuit. As a close family member described prior to Hari Raya, that decision was dumb. It affected morale in Sime Darby and worst still Zubir will likely win. All decisions were approved by the Board of Directors.

To put wool over everyone eyes, Musa had Sime Darby sign a Corporate Integrity Pledge to formalise its commitment in fighting corruption on June 9.

The ink on the pledge isn't dry yet, the company is showing only signs of turnaround and already talk is they are going back into the Merger & Acquisition game with a 5-year plan. Sime Darby past foray via M&A ended as failures. On the other hand, they are losing confidence as effort to create value kept failing under Musa's watch.

M&A seemed to be the more convenient option.

As of last week before the Hari Raya holidays, they were prepping the market. It turns out Sime Darby is acquiring a 30% stake in E&O for RM766 million.

But something strange about this deal. Why did Sime Darby become the biggest shareholder, paid a premium for the shares, and is the more established player in property development but forgo management control?

Could it be because of the presence of a controversial figure in this deal? And also, there arise the question of unethical transaction.

Will the SC investigate? Doubtful ...

Strange buy

Former acting group chief executive Datuk Azhar Abdul Hamid who is taking over position as CEO of used to say, “We need to create value again for shareholders to make up for what we have lost.”

Sime Darby had a bad record in the M&A game with a history of massive write-offs. The recent write-offs raised the question whether Sime Darby is capable of creating value with Musa around. Read this The Star May 22nd article, Can Sime Darby create value?

Analyst response to this acquisition is neutral and unenthusiastic.

Having paid 60% premium for 30% equity in E&O, Sime Darby is entering into a collaboration agreement with existing managment of E&O to remain. Similar to the MAS-Airasia collaboration where Airasia stand to benefit more, E&O looks to benefit more.

Sime Darby defended the pricing and claim it is a win-win partnership. But Gunasegaran of The Star has questions, below:

Is Sime’s E&O buy strategic and fair?

A QUESTION OF BUSINESS By P. GUNASEGARAM

Saturday September 3, 2011

TWO questions need to be answered to assess Sime Darby's purchase of a 30% interest in property developer Eastern & Oriental (E&O). Is the purchase really strategic? Is the price fair? For both questions, the answers may well be no.

Let's look at the first question. It's paying RM766mil in cash for a fully diluted 30% stake (after conversion of irredeemable convertible secured loan stocks or ICSLS).

That makes it the single largest shareholder in the company but the existing management continues to be in place.

Introduced into the deal is a collaboration agreement between the two companies for sharing of knowledge and expertise, leveraging on each other's core competencies and exploitation of mutually identified economic opportunities for three years.

Here's what Sime Darby's president and CEO Datuk Mohd Bakke Salleh had to say about the deal: “The proposed acquisition will provide a springboard for us to expand our property business and the type of products we can offer. E&O is a distinctive brand in the industry and is synonymous with quality. We strongly believe that through collaboration and cross fertilisation of ideas and expertise, there are significant opportunities for synergies for both parties, thus creating value for our stakeholders.”

Perhaps. But is the chosen approach the best way to deal with this? Sime Darby has one of the largest land banks in the country. There is no lack of land to develop. Plus it has considerable property development expertise spanning 40 years having developed townships, bungalows, houses, condominiums, and commercial projects.

Is acquiring a 30% stake in what is at best a niche developer of high-end properties the way to acquire expertise? Or would it be better for Sime Darby to acquire the necessary expertise by developing its own capabilities in-house and hiring selectively appropriate people and consultants to fill in the gaps in its own management?

It would seem under the circumstances that Sime Darby has more experience and expertise than E&O and even if it lacked some of these in some areas it would have been perfectly capable to hire the necessary expertise instead of an expensive acquisition which gives it no control of the company even.

Sime Darby would have done something more strategic if it put in place and executed a plan to develop its own in-house capabilities so that it can better exploit its own considerable land reserves of thousands of hectares efficiently and without having to make expensive minority investments to get expertise.

Recall that early last year Sime Darby went into an equal joint venture to develop a RM1bil commercial project in its established Bukit Jelutong housing area in Shah Alam, Selangor with another property developer, Sunrise.

Again why did Sime Darby, a developer with a long and varied track record, need Sunrise, an established condominium developer with limited experience in commercial development, to put up a commercial centre? Has not Sime Darby more expertise than Sunrise in this area?

Sime Darby and Sunrise will have equal stakes in a joint venture to develop 20.95 acres in the 180-acre Bukit Jelutong township. The land comes from Sime Daby's huge land bank, probably the largest in the country.

The price of the three pieces of freehold commercial land land was RM114mil, or RM125 a sq ft. That is a rather good price for a buyer considering that the gross development area is 2.7 million sq ft and it is a RM1bil project.

In fact, one may be hard put to buy residential land in Bukit Jelutong at that price now!

Sime Darby really needs to get its strategy right here and now.

Next, is the price fair? The acquisition was made at RM2.30 per E&O share and per ICSLS. That's a premium of a huge 60% over E&O's closing price of RM1.45 Thursday before it was suspended on Friday pending the announcement.

In fact E&O's price was climbing steadily from around RM1.20 end-March for a 21% gain despite the broad property index dropping nearly 140 points to about 960 or a decline of 13%.

Sime Darby said that the acquisition was at a 20% discount to E&O's estimated realisable net asset value of RM3.2bil. However it is not clear how this was estimated and over what period of time these assets would be realised.

Basically it means that the three sellers of the E&O stake benefited enormously by getting a 60% premium over the market price for their stake. Their gains over the market price alone would have amounted to a massive RM283mil.

Perhaps Sime Darby, even if it thought that this was the best route for its property sector strategically, could have made a partial offer directly to all E&O shareholders for a 30% stake at a more palatable premium to market and then accepted all offers proportionately.

That would have meant that all minority shareholders of E&O would have had an opportunity to partake in Sime Darby's very generous offer instead of just the select three. The select three are Datuk Tham Ka Hon also known as Terry Tham managing director of E&O; Tan Sri Wan Azmi Wan Hamzah of Land and General fame; and GK Goh Holdings Ltd of Singapore which sold their stockbroking operations to CIMB group some years back.

Yes, Sime Darby is big and yes it has a lot of cash and yes it generates a lot of cash too. Which is why its strategic moves must commensurate with its overall size. Making a joint venture here and an acquisition there is not going to do much for its property division but will instead spread its resources thin.

Revamping it to reflect the size, scale and complexity of its property operations and to enable it to acquire a capacity to undertake all manner of property ventures with the help of appropriate consultants such as architects, designers and planners and keeping all the profits for itself will help it much more. That's what other property companies do.

■ Managing editor P Gunasegaram thinks that many bad corporate decisions are made in the name of this nebulous thing called strategy.

Controversial figure

Why did Sime Darby pursue this deal? That is the question on everybody's lips.

To answer that, always trace the personalities involved. On the E&O side, the original major shareholders are Datuk Tham Ka Hon also known as Terry Tham, the managing director of E&O; Tan Sri Wan Azmi Wan Hamzah of Land and General fame; and GK Goh Holdings Ltd of Singapore.

While on Sime Darby, there is still Tun Musa as Chairman and CEO, Dato Bakke Salleh. What need to be said has already been said.


The Star report dated September 5th revealed someone supicious. Read extract below:

For the last month or so, the rumour mill was working overtime around Eastern & Oriental Bhd (E&O), the luxury lifestyle property developer, that a merger or acquisition was in the works.

First came the persistent speculation that SP Setia Bhd would merge with E&O, which was soon quashed by SP Setia. Then last week - quite out of the blue - Sime Darby Bhd announced it was acquiring a 30% stake in E&O for a significant premium over the latter's share price.

In early August, E&O's shares galloped to a three-year high of RM1.75 on the back of the SP Setia merger rumours, then came down again in line with the global stock slump. Yet, amid the broader market sell-down a few weeks later, its stock again saw aggressive trading, this time from its own shareholders who appeared to be upping their stake.

The notable ones included GK Goh Holdings Ltd, a substantial shareholder of E&O, and Datuk Azizan Abd Rahman, a director of E&O. According to shareholder changes filed with Bursa Malaysia, GK Goh had bought 1.25 million shares in three days, raising its stake to 11.6%, while Azizan acquired 100,000 shares.

The upward trend in E&O's share price can be observed since Aug 24, from RM1.43 to Friday's close of RM1.60, an 11.9% increase.

Ah ... it's Azizan or as this blog used to call him, "Mrs Zarinah."

Is that legal or more precisely, ethical for the company's Chairman, Dato Azizan Abdul Rahman, who is husband to the Securities Commission Chairperson, Tan Sri Zarinah Anwar to buy before a major corporate announcement?

It's doubtful that SC will do anything there.

Azizan was in our strike zone throughout June-July 2010 arising from SC's roughing up reporters in their investigation. His long historical link with Dato Kalimullah, Tan Sri Nor Mohamad Yakcop and other evil doers were exposed.

Azizan involvement as Mr Fix-It in many questionable deals were revealed. In all the deal, there is the wife, Zarinah in SC capable of helping to close one eye. See here or go to the Google Search on this blog and type the keyword "Zarinah Azizan".

Zarinah and Azizan felt the heat from our expose last year and attempted to apply political pressure on this blogger through a "minister". Sorry, that pisses us more than scare us.

They have been keeping quiet since. Zarinah got her extension as SC Chairperson. After more than a year, did they think their exploits are forgotten? Well, this blogger is still asking why Dato Seri Najib is not replacing Zarinah with someone truly honest, ethical and capable?

Without a legitimate basis, the new question that should be asked:

Is this strange deal to purchase 30% E&O at 60% premium and without management control had an enabler as in the hands of Azizan up the SC Chairperson's baju kurong?