Sime Darby buys 30% stake in E&O at massive premium

Government-linked Sime Darby has bought a 30 per cent interest in Penang-based property developer E&O at a 60 per cent premium.

The purchase price for a diluted 30 per cent stake comes up to RM766m in cash. The acquisition reportedly was made at RM2.30 per E&O share and per ICSLS – a whopping 60% premium over E&O’s closing price of RM1.45 on Thursday.

Ordinarily, we shouldn’t be concerned. But Sime Darby is a GLC and its substantial shareholders are as follows:

Well, one argument for the premium is that Sime Darby is effectively paying for a controlling interest in E&O.

The other argument given by Sime Darby, as reported in The Star:

Sime Darby could indeed use its financial resources to poach the best brains (for property development) but in this case, the acquisition and collaboration provides immediate access to a high-performance team that has a track record of successfully developing and bringing to market, luxury and niche developments. Indeed, there are many ways to achieve that access, but in this case, when the opportunity presented itself, we took it.

That is, Sime Darby perhaps can now make use of the E&O brand name to market its own property products.

But P Gunasegaram of The Star points out:

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… 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.

The deal effectively means that the major shareholders are cashing out at very generous terms via a GLC.

E&O is just about to embark on Phase II of the Sri Tanjung Pinang project on reclaimed land off the coast of Tanjung Tokong.

The Sime Darby takeover comes weeks after another controversial and unrelated deal in mid-August when the Esso Malaysia Bhd share price plunged by 19 per cent after its parent ExxonMobil International Holdings Inc sold off its stake to San Miguel at a significant discount to its last traded price.