Saturday, September 16, 2006

The Pirates which seized the Armada

2003. That was when Bumi Armada went from a public listed company to a private company.

The following is a link to Ms.Claire Barnes (of Apollo Investment Management) notes.


    The problem lies in the Malaysian listing rules. If the controlling shareholders receive acceptances to take their stake up to 90%, they can proceed to compulsory acquisition: this is fairly standard, but I doubt they could get to that level, were they not threatening a delisting. If they reach 75%, they can vote to delist - and do so unless there is a 10% vote against. In Hong Kong, that would be 10% of the unconnected shareholders; the Malaysian rules are less clear, and it seems that the controlling shareholders may be allowed to vote, so that one would need 10% of the issued capital to block - but officials of the Securities Commission have apparently said verbally that the controlling shareholder would be debarred from voting, which comes to the same thing. However, according to the offer document, if the free float is less than 25% for six months the KLSE may do the dirty work for the controlling shareholders, and delist automatically. This is the crunch, and it is a policy which should be urgently reviewed. The particular reason for urgency is the vote at hand: many investors are not allowed to hold unlisted shares; many more are unwilling to do so, given the lesser liquidity and lesser protection of minorities in an unlisted company. If investors know that they will be forced out eventually, and have a choice between RM7 now and RM7 in 6-12 months' time, the only rational decision is to accept now. But it is not a fair choice, and the KLSE should not be assisting controlling shareholders to squeeze minorities


  • To go back to the merits of the shares: in the five years since we first bought Bumi Armada, revenue has tripled. This corresponds to growth of 25% per annum, which is perhaps slightly higher than the growth in other aspects of the business, but broadly reflective. In purely qualitative terms, before thinking about valuation, this is one of the gems of the Malaysian market. It has an excellent service record, it has good relations with its customers in the offshore oil and gas sector, and apart from 1997, when it recorded unrealized FX losses on an appropriately matched loan book, it has sustained returns on equity of comfortably over 20%. It is highly cash generative, and when the Land & General stake was overhanging the market we put forward an MBO-and-buyback proposal which would have seen the debt paid down in short order while generating phenomenal growth in earnings, net assets, and cashflows per share. This opportunity was not taken, but delisting aside, the shares would remain attractive; the offer is far from generous, and clearly includes no premium for privatisation. We didn't sell at RM8.00 two years ago, and Mayban Securities on Friday published a buy recommendation valuing the shares at RM12.20, which is arguably conservative.

    Bumi Armada reported earnings per share of RM1.01 for 2002, with an upbeat assessment of outlook for the year ahead, so is on a current-year PE of 6-7 - perhaps half that of the market, despite better-than-average business characteristics and growth prospects, although some discount is normal for illiquidity. In its recent announcement, it has however cut back on operational background, provides no details of major contracts, and omitted any final dividend despite its earnings growth. (This last has particularly incensed some minority shareholders who are surprised 'that Ananda Krishnan should be involved in such a deal'.) This reticence is unfortunate given the conflicts of interest involved.

    In the event of a forced delisting, we believe that there would be a legal case against the directors and the controlling shareholders for oppression of the minorities, but costly and time-consuming legal action is a last resort for investors in any jurisdiction.

    We were pleased to see that Mayban remains optimistic about Bumi Armada's prospects, but admit to being surprised by the timing. Maybank, its parent, was amongst those which originally jumped at the RM7. This must be proof of their Chinese walls - or of the different thought processes of bankers and investors. We are more impressed by this than by the role of RHB Sakura, which also agreed to sell its Bumi Armada shares in August, and wonder whether it was already advising the company or the buyer: as far as we know, the invitation was extended only to Malaysian banks, and not to a single foreign bondholder. Bondholders who expressed a desire to participate immediately after the deal became public were told that it was already too late - which is presumably lawful, but was certainly discriminatory, and not the sort of thing to make foreign investors think they are on a level playing field.

    If an offer is mandatory, it is not necessary to have bureaucrats review the decision. In this case, the controlling shareholders have to pay RM7, but they only have to pay it much later to minorities than to the favoured few. In other cases, it might suit a cash-strapped acquirer very well to avoid a general offer altogether; again, why should officialdom help him? (To avoid any confusion, we would like to be absolutely clear: if a shareholder acquires control, there should be a general offer at the same price, but minority shareholders should be free to refuse.)

    Information flows are important, and much more troublesome than they should be in the era of electronic communications. International investors frequently cannot obtain announcements and circulars through the global custody network in time to consider them adequately; frequently they arrive too late to meet corporate action deadlines. Listed companies should be required to copy the local stock exchange and international wire services with all announcements relevant to investors - such as announcements to Euroclear. This responsibility should not be left to companies: they respond when it suits them, and forget when it doesn't

And of course I was way too familiar with this incident. I was active in an old stock forum and the following is some postings made.

Here is an old posting from an old friend.

  • Nomore and others, any information about this company? So quiet
    lately after the acquisition by Anandan Krishnan. Some remarks:

    - There will be a General Offer at RM7 per share. I have nothing
    against that. This is the same price that was offered to the L&G
    bondholders, they agreed, and I can understand that, since
    bondholders are an other breed then equity-investors, they just
    wanted (part of) their money back. By the way, the bondholders got
    their money long time ago, the longer the GO will take, the less
    attractive this offer will be, the company is making about RM1 net a
    year. As it now stands, I am not inclined to accept this offer.

    - Most likely, after that there will be a MANDATORY acquisition at RM
    7 per share; I
    find the price simply not enough, such an acquisition,
    whereby people are FORCED to hand over their shares, should be at a
    price, which is very clearly generous, relative to a lot of
    (for instance in comparison to other listed companies).
    a PE of around 7, having had a healthy growth, with a high ROE (30%)
    and ROA (17%), and with good future prospects (even considering their rather flattish recent results on the operational level), I find the
    offer clearly to low.
    Barmada's share has been quite cheap for a long
    time, but firstly a few years ago they were highly geared (so quite
    risky, interest cover is nowdays very comfortable) and secondly there
    was the potentiel overhang from the shares issued to the bondholders
    (people don't like to buy a share, when the market could be flooded
    by millions of shares).

    - Big dividends are normally offered at the announcement of the 3Q
    result, I expected this time 30ct TE (they can easily afford it, with
    a very healthy cash flow). Strangely enough, no announcement this
    Is it possible that they want to declare the dividend AFTER the
    Mandatory Offer, so that they can keep all the money for themselves,
    instead of giving part to the minority shareholders?
    If so, that
    would be REALLY disappointing, and, I think, not fair.

    What do you think?

Yup, there were many investors who were annoyed at how Bumi Armada was delisted from the exchange.

Let's look at Ms. Claire Barnes funds performance (this is their Investment philosophy ). You can see the performance of the fund here:

Now let's refer back to her original pirates article which was written back in 2003.

Pirates attempt to seize whole Armada: pitfalls of investing in Malaysia

Read her opening statemtent again.

  • There are many attractions to living in Malaysia, but we cannot muster the same enthusiasm for investing here (a change from July 99, when we were defending our decision to hold; our major investment then as now was Bumi Armada). Our recent experience has been far from encouraging, and it seems timely to provide an update.

Her 'pitfalls of investing' in Malaysia.

Now look at this.. "The 2Q report has been posted."

In that report, her fund gives a report of their equity percentage per country. Look at the percentage of how much of her funds is invested in Malaysia.

See how privatisation of listed stocks is simply a no-no?

And in fact the story does not end just like this.

May 24, 2005 Corporate: AK's Bumi Armada to list again

Two words. How can?

Back then, Bumi Aramada came up with an extremely long list on why it wanted to be privatise. So if they do list again, isn't it an admission of contradiction of their earlier reason why it wanted to be privatised?

So far, there is no updates on this issue but I hope this company should not be granted listing at all.

Local saying: "Suka-suka list, suka-suka privatise. Macam-macam ada! Apa pun boleh!"

And if so.. what's left of the integrity of the stock market?