CSM: doing a flavour for DON:prayPUKS!

I refer to the Malaysakini report New firm takes over Maika Holdings.

The salient facts about G Gnanalingam's recent offer to buy out all Maika shareholders are as follows:

1. Maika's paid up share capital - RM125 million.

2. Gnanalingam's offer price - RM106 million or RM0.85 per share.

3. Oriental Capital Assurance Bhd's (Ocab) paid up share capital is RM100 million and as at Dec 31, 2008 it's audited NTA was about RM103 million.

4. Maika's investment in Ocab's share capital is 74.165% or 74,174,640 shares, ie, Maika is Ocab's holding company as it has both more than 51% equity shares and control in Ocab. Maika's CEO Vell Paari a/l Samy Velu also sits on the board of directors of Ocab.

5. Prior to Gnanalingam's buyout proposal, there were two other offers to Maika as follows:

a. RM129 million or $1.75 per share by Salcon

b. RM149 million or $ 2.01 per share by Usaha Tegas, the holding company of tycoon Ananda Krishnan.

The Salcon offer was frozen by a court order taken out by Nesa Cooperative, Maika's single largest shareholder who had objected on the grounds that Maika's 74% investment in Ocab had not been independently valued.

Nesa had recommended the investment in Ocab be sold by open tender. Nesa also revealed there were two other parties interested in acquiring Ocab's shares, one from Europe and another from Australia.

As to the RM149 million offer by Usaha Tegas, apparently Maika rejected this offer as it could not accept certain pre-conditions insisted upon by Usaha Tegas. What these pre-conditions were have not been revealed by Maika's directors.

In the light of the above, I demand the board of directors of Maika explain:

1. Why do they think Gnanalingam's offer of RM106 million is suddenly acceptable to them when they unequivocally know there are local market players in the insurance business and foreign parties who are willing to pay more?

2. Why are they unwilling to offer the Maika or Ocab shares for sale by open tender with a reserve price of say, RM150 million, given the Usaga Tegas offer? If as Gnanalingam says, Maika's debts are RM30 million, the net minimum proceeds of RM120 million would be a fair and handsome reward to Maika's shareholders who for some 20 years have received no dividends while there was a period when their CEO was paid a remuneration of RM15,000 per month.

As to Gnanalingam being quoted as saying he's doing 'national service', he contradicts it by saying he will need six months to find another financier which suggests he is looking at flipping the Maika/Ocab shares for a quick gain. So much for national service.

Financiers may do charity work and make sizeable donations from their profits and gains, but their natural predatory instincts mean they will always squeeze out the juicy bits of the best deals for themselves.

It seems clear to me, and for the matter any sane person, that the Maika/Ocab shares are worth a hell of a lot more than Gnanalingam's RM106 million offer.

The RM64,000 question is why Samy Vellu, Vel Paari and the Maika board of directors appear to be not interested in maximising returns to their long-suffering shareholders which include themselves by supporting the lowest offer?

Is there a deal behind the deal?

I would like to add that the minimum premium a buyer should pay for a controlling stake in Maika/Ocab is 50% of Ocab's NTA of RM103 million, ie, the total minimum consideration should be RM150 million as:

1. The potential buyer would be acquiring a controlling stake (74%) in Ocab as opposed to being a mere passive investor relying on dividend income for a return.

2. In Malaysia, you cannot secure a licence for owning/operating an insurance business without Bank Negara's approval, which includes vetting the shareholders and board of directors. Thus, the market is restricted for insurance business start-ups and acquisitions, justifying a higher premium for a new investor.

3. Ocab's Unearned Premium Reserve as at Dec 31, 2008 stood at RM48 million which is quite healthy compared to its paid-up share capital, share premium and reserves of RM103 million. Thus, future earnings are reasonably assured. We do not know what other general provisions are included under Ocab's reserves.

4. Ocab's properties and investments totalling RM316 million are likely to be worth a lot more than their book value.

5. In 2000, Bank Negara's guidelines for bank and financial institutions mergers was for pricing to be in the region of 1.5 - 2 times revalued NTA.

6. Vell Paari, Maika's CEO and a director of Ocab, increased his beneficial interest in Ocab by 111, 250 shares in 2008 as disclosed in Ocab's audited financial statements.

All the above leads to the conclusion that Gnanalingam's offer of RM106 million for a 74% controlling stake in Ocab, a mere 2.91% premium over its NTA of RM103 million is derisory, disingenuous and an attempt to put one over the many ill-informed Maika shareholders.

The timing of Gnanlingam's offer announcement was surely calculated with one eye on the by-election at Hulu Selangor tomorrow.

What is astonishing is that Samy Vellu, his son Vell Paari and the board of directors of Maika, and Prime Minister Najib Abdul Razak as well are all supporting Gnanalingam's offer.

Whose interest should Maika directors be rooting for - its shareholders' or that of Gnanalingam's? And why are they reusing (ERRATA: 'refusing' for reusing ...YL) to go for a sale by open tender?

CORRECTION: I made a beginner's error above in evaluating Gnanalingam's offer to buy out Maika shareholders which effectively would also enable him to take control of Maika's main investment, ie, its 74.165% holding in Oriental Capital Assurance Berhad (Ocab). My sincere apologies to Gnanalingam and to your readers.

Gnanalingam's offer would actually effectively value 100% of Ocab at RM143 million. His offer for 74.165% of Ocab at RM106 million then would result in a premium of 28% over its proportionate book value. This is based on publicly available information and Ocab's last audited accounts (December 2008).

ADDITIONALLY, from donplaypuks.blogspot.com:

(DPP's letter in full to the Editor, Mkini, which was of course edited to suit the online news' policy...YL, Desi)

25/04/10

Dear Sir

I made a beginner's error in evaluating Gnanalingam’s offer to buy out Maika shareholders which effectively would also enable him to take control of Maika’s main investment, i.e. its 74.165% holding in Ocab. My sincere apologies to Gnanalingam and to your readers.

As the table below shows, Gnanalingam’s offer would effectively value 100% of Ocab at RM 143 million. His offer for 74.165% of Ocab at RM106 million then would result in a premium of 28% over its proportionate book value. The table is based on publicly available information and Ocab’s last audited accounts (31/12/2008) posted on the web.

Offer by Gnanalingam Salcon Usaha Tegas

Ocab issued share capital 100 100 100

(million)

RM million RM million RM million

Ocab NTA 103 103 103

74.165% owned by Maika 76 76 76

Offer amount 106 129 149

Premium 30 53 73

Premium % 28% 41% 49%

Effective Ocab valuation 143 174 201

Effective value per share 1.43 1.74 2.01

However, I stand by my earlier opinion that Maika shares can command a better price than that offered by Gnanalingam, particularly in view of:

1. The higher offers and valuations from Salcon and Usaha Tegas.

2. Possible revaluation surpluses from Ocab’s properties and investments, other ‘secret’ reserves as well as write backs of over provisions and estimates for outstanding claims.

3. Possibilities of being listed on its own or being injected into another insurance company or financial institution listed on the KLSE.

4. The restricted and restrictive entry level for anyone wanting to own an insurance business in M’sia vis-a-vis Bank Negara control and oversight.

5. Keen interest shown by foreign parties from Australia and Europe in Ocab. In view of PM Najib’s relaxing of rules for more foreign participation in the financial sector. I would not be surprised at all if potential buyers from Europe and Australian were to offer Maika shareholders an even better return than hitherto imagined!

I maintain that for purposes of transparency and accountability, Samy Velu, Vell Paari and the board of Maika owe a fiduciary duty to its long-suffering shareholders to pursue the route of sale of shares by open tender.

Thank you.

donplaypuks®