The Star,
anita@thestar.com.my
THE curtains are being raised on the crumbling house of cards in the most protracted prickly issue among the Malaysian Indian community. For over two decades, Maika Holdings Bhd, MIC's investment arm, initially touted as the “all Indian dream”, has been riddled with deep distrust, intense suspicion and weakened by scandal.
So, it was not surprising that when Westports Malaysia Sdn Bhd executive chairman Tan Sri G. Gnanalingam first revealed his plans to takeover Maika in a rushed press conference in late April, instead of stemming the voracious speculation which was his original intent, he had re-ignited the long pent-up suspicion.
Questions aplenty flowed on steady stream: Is this rescue a political play? Is it a brokered settlement with the MIC leadership? How many layers of agenda are there in this exercise? What's in it for Gnanalingam? Are the poor Indians, who have long endured this debacle, getting a raw deal?
It didn't help at all that the takeover plan was revealed by politicians just days before the Hulu Selangor by-election, which was perceived by many as an attempt to woo voters.
Truth is, as CIMB Group chief executive Datuk Seri Nazir Razak put it: “It's a very simple deal.” (CIMB is adviser and financier of the special purpose vehicle G Team Resources & Holding Sdn Bhd formed to undertake the exercise. G Team is equally owned by Gnanalingam and Datuk S.Kunasingam).
At a press conference to announce the conditional takeover offer on Wednesday, Nazir started out his speech this way. “I'm intrigued that when I announce billion dollar deals, the room (venue of the press briefing) is only half full but today, it's very full. There must be a lot of interest.” An understatement, indeed.
If you strip out the past, the highly-strung sentiments and the politics from the deal, Gnanalingam's plan - to wrest control of Maika, pay back shareholders their original investments, manage the debts, flog off its two valuable assets (an agricultural land in Sepang and a 74.1% stake in Oriental Capital Assurance Bhd), the excess proceeds of which will be channelled into a fund for the community and finally close the chapter on the scandal-ridden company - is a solution which gets most people thinking - “Why couldn't this have been done much earlier?”.
Unfazed by critics and quite confident he will be able to garner over 50% of Maika shares, a condition for the offer, Gnanalingam, who is also co-chairman of the Cabinet sub-committee on Indian affairs, remarks: “A thousand opinions are not better than one action plan.”
“If we can't solve this first problem, it's no use being on the committee. That's why I'm doing this.”
A simple deal, indeed
G Team has proposed to acquire all 125 million shares in Maika at 80 sen per share or RM100mil cash (the 25 million shares arose from a four-for-one bonus issue in 1996). The offer is conditional upon G Team receiving more than 50% of the voting shares of Maika. Once the offer becomes unconditional, it will also trigger a general offer for OCA shares (see also page 21).
On Friday, in what is the first sign that the deal has moved one step forward, Maika's board of directors confirmed that they had received a takeover offer, further stating that they were not seeking an alternative person to make a takeover offer of the company's shares other than G Team.
Maika shareholders are expected to receive the offer document within 21 days and the offer will remain open for at least 21 days with an option to further extend.
G Team has been given a time-frame of one year by the central bank to dispose of its stake in OCA. As for the encumbered land, once its title and valuation have been verified, a committee would be set up to determine the best way to realise the value of the land.
Should the exercise result in a financial gain, the monies will be donated to an established charity for the benefit of the Malaysian Indian community while any loss will be borne by G Team. G Team does not plan to continue the operations of Maika.
“It is our intention to close the chapter (of Maika),” said Gnanalingam.
And this - “There's no political involvement in this exercise. I feel Indians should resolve the issues themselves and as quickly as possible.”
The big question - is it a fair offer?
The offer price has drawn mixed response.
“He (Gnanalingam) is a businessman. He is only talking of giving shareholders their original investment value. If he's willing to pay RM1 for 125 million shares, then it's reasonable. What happens to those who bought the bonus shares at RM1? After waiting for 26 years, not many people are going to be happy with the offer,” says Datuk S. Subramaniam, president of Nesa Cooperative. (Nesa Cooperative filed and won a court order to stop the sale of OCA back in 2007)).
Gnanalingam, a former tobacco and advertising executive and now port owner since 1996, was ranked the 13th wealthiest man in the country with a net worth of some RM800mil by the widely followed rich index by Forbes last year. With that in mind, there are many who ask “Why couldn't he pay more?”
CLICK to view graphics Here's why.
Maika's latest net tangible asset stood at 23 sen per share; at the offer price of 80 sen per share, the offer translates to 3.5 times book. In addition, it has liabilities of some RM60mil. (Maika's 2006 accounts show that it has two debts - RM34mil owing to Danaharta Managers and RM18.3mil owing to CIMB, which total RM52mil.)
In fact, according to a source, one of Maika's creditors, Danaharta Managers, had earlier agreed to take a haircut on the outstanding debt. In a letter to shareholders dated August 2007, Maika's then chairman Tan Sri Abdul Rashid Manaff alluded to that. He said the board was hopeful of obtaining a substantial waiver of the accumulated interest of nearly RM20mil owing to Danaharta Managers. If this is still the case, then the debts ought to be lower than estimates.
But sources close to the offeror reveal that since news of a potential takeover has surfaced, the creditors have been less amenable to providing the haircut.
Back to the valuation. The Tumbuk Estate in Sepang is worth RM10mil while based on its latest available book value as at 2008, OCA is said to have a net tangible asset of RM102mil.
Based on 1.5 times book value, Maika's stake in OCA is worth some RM113.4mil. If you total the value of OCA with that of the land and minus the debt, it comes up to some RM63mil, as opposed to the total purchase price of RM100mil.
It is believed that in FY2009, OCA returned to the black after a three-year loss streak. A company source said the insurer's latest NTA stood at RM120mil as at end-December 2009. Based on those figures, Maika's stake in OCA at 1.5 times book comes up to RM133.4mil which, after including the land and debt, totals RM83.4mil.
“However you skin it, it's going to be pretty tough to get it to RM100mil,” says Nazir, adding that it is an offer at fair value based on what is available at this point. “It's fairly offered to everyone and we hope majority will accept.”
But there may be one stumbling block to the sale of OCA which has been there since 2007 - Nesa Cooperative's court order to freeze the sale of OCA.
“I have repeatedly said that at any time when an offer is made and the price is reasonable, we will apply to lift the injunction. We know there were offers in the past which valued the company at RM130mil and RM149mil. So, as far as the insurance company is concerned, these are the parameters. If the price is reasonable, there's no problem,” says Subramaniam, who owns some 8,000-10,000 shares
Disgruntled shareholders
Many shareholders appear only too relieved that the latest takeover offer would finally mean closure to the painful Maika saga, especially so for those who have written off the possibility of ever getting their monies back.
In fact, along the years, many shareholders were said to have sold their shares at 50-80 sen to interested parties. “These people were poor and desperate to raise any cash they could,” says an observer.
And there are others who believe they should hold out for a better price. One of them is S. Nadarajah, a management consultant.
“We welcome the move. But what's important is the price, which I feel is ridiculously low. It looks more like foreclosure value than real market value. OCA has considerable value that can be unlocked. It's a much sought after business,” he says.
That may be perception more than reality. Sources close to the insurer says a lot need to be done to bolster OCA's waning status. “Yes, it (OCA) is a valuable asset but it is nowhere near to what some Maika shareholders think. The person who buys the company needs to pump in at least RM20mil to revamp the operations, recruit people and get things back on strong footing. A lot need to be done. Some are saying it ought to be sold for RM200mil. I think that's a pipedream,” says the source.
“Coming in and out for Gnanalingam makes sense as he can make almost dollar for dollar return on what he paid for Maika. The downside could be limited unless of course, they take too long to flip it. The longer they take, the less value they will get,” adds the source.
Ultimately, whether the offer price is fair would be judged by how much the asset is finally disposed of, which has been promised will be an open and transparent process.
“There's clearly no intention to short-change anyone here. We have to start from somewhere. The key thing is to look forward,” says Nazir.
Moving on
Gnanalingam is clearly anxious to separate his takeover plan from the past. Why not? He's not responsible for the controversies that have long dogged the group. “I don't want to go into what happened in the past 26 years. It's irrelevant,” said Gnanalingam.
Unfortunately, that may be easier for them to do than the tens of thousands of Maika shareholders, who over the years have had to suffer the crushing realisation that their investments in Maika have painfully diminished.
That could mean another thing - that while the cleanup may not take too long, the repair could take much longer.
“Maika is a commercial entity that has been bogged down by political dogma. That's the main reason for its downfall,” says a corporate observer.
Back in the 80s, RM100mil in the coffers was an eye-popping load of money. “If the company had invested most of its money in equities then and sat pretty up until now, it would have billions in its coffers today,” says the observer. The colossal loss of opportunity, indeed, is hard to stomach.
“Political parties need to have their own ways of doing things in the business world. But they can't run away from the simple fact that just being granted access, is no guarantee to making returns. It does not mean, you don't have to manage it. Execution is still the issue whether you are the investment arm of Umno, MCA or MIC,” says the astute observer.
There are many issues about the company that are puzzling. Maika has not conducted an annual general meeting for the past three years.
The last annual accounts received by members was for financial year 2006. It currently only has a two-member board - Datuk C. Vijaya Kumar, chairman and Vell Paari, the CEO. Paari is also the son of Datuk Seri S. Samy Vellu, MIC president and the architect of Maika.
(
StarBizWeek reached Vijaya Kumar and Paari but failed to get any comments for this article).
Given that there are adequate safeguards and checks and balances in the law, it is deeply distressing that the regulators have not appeared to act in a meaningful way.
At this point, what we do know for sure is that Maika, once trumpeted as the Indian community's answer to uplifting their flagging socio-economic status, is a dismal flop.
But what we do not really know is - how exactly did it reach this point?
Once the chapter is closed, will we ever?
****
Saturday May 15, 2010
A little bit of history
MAIKA Holdings Bhd’s current state belies its euphoric start. Many, a lot of them rural folk, were swept away by the fancy promises of future profits by its promoters and the fact that their hard-earned monies, ploughed in to buy Maika shares, would turn them into stakeholders of the national economy.
For many working-class Indians, it was not solely the promise of wealth but the belief that this was the start of the walls of economic barriers being pulled down to raise the status of the community. Some called it a “certificate of pride”. On hindsight, this would turn out to be highly naive.
But there were also many urban Indians who were smitten by the idea of investing for decent returns and scooped up Maika shares; some of them have sold their shares over the years as the realisation crept in that chances of reaping returns were thinning out.
Maika was set up in 1983 as the MIC’s investment arm, to shore up the corporate equity of the Indian community from a paltry 1% to an ambitious 7%. It is the brainchild of long-serving MIC chief Datuk Seri S. Samy Vellu.
With that main agenda, the drum roll befitting a major festival began in 1984, with the intention to court thousands of Indians to subscribe for the restricted public issue of 50 million Maika shares at RM1 apiece, which was raised to 100 million shares due to the overwhelming response.
The picture of hopeful crowds which thronged the branches of United Asian Bank back then stands in start contrast to that of frustrated shareholders at highly-strung Maika AGMs caught up in fist fights and angry words under the hawk eye of hundreds of security personnel years later.
Many had pawned their jewellery and other valuable possessions and borrowed, undeterred by the then high interest rate regime, which resulted in a two-fold oversubscription for the shares.
One of them is management consultant S. Nadarajah, who was then 25 years old and employed as a clerk in a Chinese firm. He borrowed to buy 1,000 shares which, as a result of a four-for-one bonus issue, today has grown to 1,250 shares. Much to the chagrin of his mother, who was somewhat sceptical, his father too went ahead and borrowed to buy another 1,000 Maika shares.
“I was socially conscious. I didn’t just invest for returns. I deeply believed that it would help the Indians who were under-performing in terms of job opportunities and economic development. I had hoped the company would flourish,” says Nadarajah.
And it did for a bit. It was reported that in the first financial year, Maika made a pre-tax profit of RM2.17mil. Maika’s first chairman Tan Sri G.K. Rama Iyer, the former secretary-general of the Primary Industries Ministry, was appointed in 1985. Dividends of between 3% and 8% were paid in 1985, 1986,1988, 1991 and from 1993 to 1995. There was also a bonus issue in 1996.
Sadly, it didn’t take too long for sentimental expectations to match reality. As a business concern, Maika was not flourishing. In fact, it was anything but. The company was besieged by operational losses as a result of questionable ventures and when it did make operative profits, they were at best unimpressive. The seeds of discontent and upheaval was beginning to sow in the community.
The cracks started showing in 1987 and many attributed this to its overzealous expansion into a smorgasbord of businesses including commodities, petrol service station, cattle rearing, aquaculture, fruit farming, chopstick manufacturing and soft drinks.
According to news reports, the group suffered losses of RM532,025 in 1987, RM521,811 in 1988, RM3.09mil in 1989 and RM4.69mil in 1990.
At its peak, Maika had some 18 subsidiaries, most of which were inactive or loss making, with the exception of Oriental Capital Assurance Bhd. One of its memorable ventures include the acquisition of Anthonian bookstore, which further contributed to the losses.
It also made profits from the “sale of investments’’ which usually involved government-allotted blue chip shares such as Telekom Malaysia Bhd, TV3 and Tenaga Nasional Bhd, proceeds of which were used to write off debts and losses.
Many opined that Maika should not have been so hasty to sell those shares as in current times, those shares could be worth a handsome sum.
In the mid-80s, it acquired 386ha of the Tumbuk oil palm estate for RM13mil from the National Land Finance Co-operative Society (NLFCS).
Of the countless many subsidiaries it had formed, only one appeared to be a prized asset – one of the earliest insurers in the country Oriental Capital Assurance Bhd (OCA, formerly known as United Oriental Assurance Sdn Bhd).
Following a directive from Bank Negara that all insurance companies need to shore up their paid-up capital to RM100mil by end-June 2001, OCA proposed a rights and bonus issue. Maika’s share of the rights issue totalling 31.5 million shares at RM1 each was part-financed by a syariah facility of RM28.3mil from the former Southern Bank Bhd (now part of CIMB Bank Bhd) at an interest rate of between 8.5% and 9% per annum. The loan was taken on a short-term basis with the understanding that the insurance company would be listed on Bursa Malaysia. That, however, had failed to materialise. As at Aug 15, 2007, the outstanding loan obligations of Maika to CIMB and Danaharta Managers Sdn Bhd totalled some RM55.6mil including interest. Those debts remain outstanding till today.
By 2000, creditors were knocking on its doors demanding repayments. To fully settle a revolving credit facility of RM23mil which was demanded, the company disposed of 755 acres for RM38mil cash in 2005. According to Maika’s annual report 2006, some RM10mil of the proceeds were also used to part-settle the syariah facility which expired at end-September 2006; the principal amount outstanding was RM18.3mil which matured in September 2007.
But that was not all. In 2000, it was stated in the company’s 2006 annual report that Danaharta Managers demanded full repayment of a debt of RM23mil which was classified as non-performing and which ballooned to RM34mil as at 2006 due to a default in guarantee obligations and interest accrued. A small portion of that debt has been settled through foreclosure of assets. Maika has managed to stave them off on the premise that it would restructure itself by selling its Tumbuk estate, investment assets and through a cash call via a rights issue. In the event the financial restructuring fails to materialise, the company and its affected subsidiaries may be required to cease being in business, it had said in the annual report. However, it added that its stake in OCA, if disposed, would be able to fully satisfy the debts and raise additional funds for suitable business opportunities.
Till today, these issues remain outstanding.
*******
Saturday May 15, 2010
The prized asset - Oriental Capital
INSURANCE companies, like most financial institutions in this country, are tempting targets because they are a licensed business, which by implication means they are not easy to come by. Furthermore, it is perceived as a major coup if an entrepreneur, never mind that he already owns a sprawling business empire, manages to grab a financial entity and add that to his stable of achievements.
Therein lies the most attractive asset in Maika Holdings Bhd's stable - its 74% owned Oriental Capital Assurance Bhd (OCA).
Its origins
OCA is one of the earliest insurers in Malaysia and its origin dates back to the pre-war days through the operations of several leading insurers from the Orient. To comply with the nation's development policy, in 1976, several overseas insurers merged their operations to form United Oriental Assurance (UOA) with Malaysians in the seat of majority control.
Datuk S. Subramaniam ... 'I agreed to sell but based on certain points.' Long after, in 2002, the company underwent another transformation through a corporate merger between UOA and Capital Insurance Bhd, hence the creation of OCA.
Oriental is engaged principally in the underwriting of all classes of general insurance business such as fire, motor and marine, aviation, offshore and transit.
OCA has a paid-up capital of RM100mil and total assets valued in excess of RM380mil. Business volume is recorded at RM244mil and its niche strength is in onshore and offshore oil and gas and marine hull and cargo classes of business.
Maika initially acquired 3.3 million shares in the insurer between 1986 and 1988. Six years later, it acquired an additional 24 million shares in the company, hence emerging as a major shareholder with 63.6% stake of the then paid up capital of RM42.7mil and a year later, it acquired another 3.3 million shares. Based on documents obtained from sources, it has been stated that the average purchase price of OCA by Maika in the books as at end-December 2006 is 81 sen per share.
In 2001, OCA made a rights issue to bump up its paid-up capital to comply with the central bank's new rules. Maika partly financed its share of the rights issue of RM31.4mil through a syariah facility of RM28.3mil from Southern Bank Bhd (now part of CIMB Bank). It is believed that the loan was taken on a short-term basis with the understanding with the bank that the insurance company will be listed on Bursa Malaysia. The plan was upon listing, Maika will divest 30% stake in the company to a bumiputra partner and repay the loan. As it turned out, the listing plans got botched due to various reasons including the listing price.
Up for grabs - or maybe not
As far back as 1995, when OCA was still called UOA, there were numerous reports quoting Maika officials saying that they planned to list their insurance arm which later morphed into plans to divest the insurer. None has since materialised.
What is commonly known is that there were two parties who were interested to acquire OCA from Maika - Salcon Bhd back in June 2007 and Usaha Tegas Sdn Bhd (UTSB), controlled by tycoon T. Ananda Krishnan, also about the same time.
In a two-page letter dated August 2007 to shareholders by the then Maika chairman Tan Sri Abdul Rashid Manaff, it was stated that the board had on June 21, 2007 accepted the offer by Salcon to acquire its stake in OCA for RM129.8mil or RM1.75 per share as it was “in the best interest of the shareholders and the future of the company. The time is right, considering the company's financial position and its loan obligations to accept the offer.”
As at end-December 2006, OCA's net tangible asset value stood at RM1.03 per share.
Salcon made an announcement to Bursa Malaysia on Aug 28, 2007 in a 13-page announcement on the proposed acquisition of OCA from Maika as well as proposed mandatory general offer for the remaining shares as it would trigger the takeover threshold. The proposed acquisition, it said, had received the nod by Bank Negara.
Many were intrigued by Salcon's move as its core business is in the construction, operation and maintenance of water and wastewater treatment plants. However, Salcon defended the move stating that it was part of a plan to diversify its revenue stream to include “long-term and stable recurring income vis-a-vis the relatively cyclical construction industry.”
At about the same time, UTSB had also expressed interest in acquiring the insurer.
For UTSB, observers said that with activities in telecommunications, engineering and power, to name a few, it could have easily found opportunities to grow business through an insurance arm.
In a letter dated end-July 2008 by UTSB executive director Ralph Marshall to Maika CEO Vell Paari, UTSB made an offer to purchase the 74% block in OCA free from any encumbrances for a total RM148.3mil, or at RM2 per share, subject to some conditions including that the net tangible asset value of OCA is not less than RM108.1mil as at the completion of the purchase of the shares.
UTSB had also sought exclusivity to buy the asset for 90 days from the date of Maika's acceptance of its offer letter considering the “substantial expenditures involved in examining the acquisition.”
The conditions turned out to be far too onerous. A day later, Maika's legal adviser shot out a letter to Marshall that it has been made clear that the “offer price for the sale shares ought to be firm and not subject to adjustment” and that some of the terms and conditions were “unacceptable.” “In the circumstances, our client (Maika) has no alternative but to reject your offer,” said the letter.
Unbeknownst to many, there was also a third offer which was made on behalf of a group of foreign and local clients to acquire the entire paid-up capital of Maika for RM1 per share in September 2007. One of the interested parties in this deal was Datuk Jeyaraj Ratnaswamy, managing partner of accounting firm MustaphaRaj.
“We were interested in taking control of the company but we wanted the minorities to stay on. We wanted a 3-5 year window to strengthen OCA and if the numbers were good, to list the entity. Then we would have asked the Maika shareholders to swap their shares for the listed insurer so they get to tap its future potential. But our offer was rejected,” Jeyaraj tells
StarBizWeek.
Spanner in the works
In comes Nesa Cooperative (Koperasi Nesa Pelbagai Bhd) led by president Datuk S. Subramaniam. The co-op, which owns 625,000 shares in Maika, had filed and won a court order to freeze the sale of OCA by Maika to Salcon. That was enough to keep the rest of the potential buyers at bay - up until today, that is.
“The injunction made it difficult for anyone to negotiate. The process was outside the scope and hands of the people negotiating because of the court order. It didn't make sense to continue so the discussion came to naught,” says a source.
Many perceive Subramaniam's move as politically motivated given that he and MIC chief Datuk Seri S. Samy Vellu are political rivals. But he dismisses that notion.
“In principle, I agreed to sell but based on certain points. Don't just limit the sale to Salcon alone. Be more transparent and open. Call for competitive bids. Try to sell it to an Indian co-operative, company or individual. That should be the first option so that we don't erode the already dismal equity the Indians have. If that can't be done, then offer to best bidders and make the process more transparent.
“I felt we could fetch a better price for OCA. I was not convinced that RM129mil (Salcon's proposed purchase price) was the best price,” he says, in an interview with
StarBizWeek.
Caught in the middle
Meanwhile, the potential divestment appears to have been a major distraction, clearly taking a toll on OCA's performance. For the past three years, prior to financial year 2009, the company has been suffering losses. In FY08, it made a pre-tax loss of RM5mil from RM16mil loss the year before.
OCA's chairman is Datuk C. Vijayakumar, who is also chairman of Maika. The three other directors are Vell Paari (Maika CEO), Albert Saychuan Cheok and C. Kirupalani.
The current CEO is Lai Poong Shen. According to sources, his contract was extended for another six months upon expiry end-2009.
“The operational results are deteriorating. There has been no investment in new systems, inadequate top and middle management staff, no succession planning which is a concern as many at top management are retiring soon. All these issues need to be fixed,” says a source.
OCA's latest audited results for FY09 have yet to be released but it is believed to have chalked up a slight turnaround on the back of investments although it continued to make losses at operating level.
“The company is operating at a very low level and it needs to be revamped,” the source adds.
“The industry is tough right now. Motor (insurance) is not doing too well. This concept of supermarket companies is also stealing away our business. For example, when banks provide hire-purchase loans for cars, their subsidiaries take all the other related business like motor insurance. It is tough being an open market company or non-bank backed insurer like OCA,” says an industry analyst.
It is against that backdrop that it becomes more imperative for OCA to have a well thought out and clearly defined business strategy, which many say, it currently does not have.
One observer says the weakness could have stemmed from the merger of UOA and Capital Assurance which was poorly executed.
“UOA was largely into personal life, motor and so forth. When it acquired Capital Assurance which was big on the corporate insurance business, the plan was to merge both and build the team but the latter never happened. So, it slowly started losing the personal as well as corporate business,” says the insider. “On hindsight, perhaps the merger was badly executed. It should have been better managed,” he laments.
Given all these operational gaps, what is the central bank doing? According to sources, the central bank has put OCA on its “Watch List” (this information has yet to be ascertained) with a long to-do-list and some “extra reporting procedures.” Some of these areas which the company needs to urgently address, it is believes, include manpower, IT systems, board and management weakness.
With all these escalating structural weaknesses, the question really is - does OCA, as it stands now, fit the bill as a prized asset?
By Pushparani Thilaganathan - Free Malaysia Today
