On A Clear Day, I Can See Forever

My blog has mostly been about a lot of bashing and flaming, in particular when major institutions do not execute or plan well. A diversion for now, which I hope will be more frequent in the future, are two major developments worth noting:

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KUALA LUMPUR, Aug 11 — CME Group Inc, the world’s largest derivatives exchange, will develop a US dollar crude palm oil (CPO) futures contract using settlement prices of Malaysia’s ringgit contracts for trading on CME Globex. CME will work with stock exchange operator Bursa Malaysia to offer the cash-settled futures contract in the United States aimed at globalising the Malaysian CPO futures market, a statement from the two companies said.

The two parties will also explore trade matching services, product licensing and minor cross-equity investments in a partnership still subject to regulatory approval. The Chicago-based exchange operator said the proposed partnership will increase its presence in Asia and expand its transaction processing business opportunities. Specific terms of the partnership will be announced later, the two exchanges said in a statement. Bursa has introduced a dollar-based palm oil contract. — Reuters

Comments: The FUPO was a start and fizzled just as many had expected (including this blog), but looking further ahead, the instrument was needed as a negotiating point to get CME to launch a similar US-dollar based contract as well. Getting it on CME is no guarantee of success, but will be the best platform for getting things right. Volume and liquidity will need to start on CME side before getting similar activity on FUPO during Malaysian trading time. It has a decent chance for success now as being on CME would at least lure the arbitrageurs. The fact that there is a corresponding ringgit based contract makes for good arb opportunity. Volume begats volume, soon I hope to see FUPO trading just as active as the ringgit based contract. The major local palm oil players have a role to play (which they haven't been doing so far) - all have been sitting back pooh-poohing the FUPO and just putting through contracts through the ringgit side. You as the major CPO players have a big role to play, you have to lead, try funneling 25% of all hedging / selling activity through FUPO because in the end its you fuckers who will benefit. Having a USD contract for futures will negate a lot of currency hedging required as you people still borrow extensively in USD. You cannot just sit back and say to Bursa "let's see what you can do". You know very well you will be the major players in any CPO based contracts - unless you think this is not going to help shore up your business strategy and options (which means you are plainly stupid to think so when there is a government body helping you indirectly to better sell, better hedge and better market your product).

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KUALA LUMPUR, Aug 11 — Malaysia’s central bank has directed a sweeping overhaul in the board of directors of the country’s largest banking group Maybank, in an unprecedented government censure on a board of a financial institution. The little-publicised revamp followed government displeasure at the controversial acquisition of an Indonesian lender by Malayan Banking (Maybank) last year, officials say. Bank Internasional Indonesia (BII) was bought from a consortium led by Singapore’s Temasek Holdings at a price that was deemed too high.

Prime Minister Najib Razak, who directed Bank Negara to review the transaction, has endorsed the central bank’s decision calling for a Maybank board revamp, the government officials say.

“The decision was also made that the board revamp will be carried out in stages and directors who are retiring won’t be re-elected to the board,” said a senior government official who was involved in top-level discussions on Maybank’s Indonesian venture.

Maybank’s main shareholders are national equity fund Permodalan Nasional and pension fund Employees Provident Fund. Bank Negara declined comment for this article, citing its policy of not discussing issues involving individual financial institutions. Maybank executives, including its chief executive officer Abdul Wahid Omar, also declined repeated requests for comment for this article. But the bank did announce the retirement of two directors and the appointment of three new members mid-last month. Between end-October last year, when the acquisition of BII was completed, and this March, three directors have resigned.

“This is part of the reforms that the PM is pushing for and it will raise the sense of greater accountability in the boards of government-linked companies,” said a senior adviser to Najib who is familiar with the central bank’s decision on Maybank.

In March last year, Maybank entered into an agreement to buy a 55 per cent interest in BII from Sorak Financial Holdings, which is majority-owned by Singapore’s Temasek Holdings. The Malaysian bank agreed to pay US$1.5 billion (RM5.3 billion) for the stake and then make a tender offer for the remaining 44 per cent for roughly US$1.2 billion. But the global financial meltdown raised questions over the health of banks in general and reignited criticisms that Maybank was paying too high a price for BII. Maybank’s position was further undermined when Indonesia introduced changes to its corporate takeover rules, which called on the Malaysian financial institution to sell down 20 per cent of its holdings in BII within two years of its takeover.

Bankers close to Maybank had argued that the disposal was surely to lead to massive losses. Faced with the prospect that the deal could adversely hit Maybank and the Malaysian banking system, Bank Negara had revoked its approval for the BII acquisition. The approval was later reinstated. The deal was finalised after the Temasek-led consortium lowered the purchase price for the transaction by US$220.5 million for the 55 per cent interest in BII. In Bank Negara’s review, which was completed in April this year, it concluded that Maybank’s purchase price for BII was too expensive. The central bank also concluded that the Malaysian financial institution did not put in place adequate measures to protect itself in the event that the deal encountered problems, the government officials said. — The Straits Times

Views: The article is so succinct and clear, I don't really have to add anything. Interested readers can search this blog for my previous postings on Maybank and BII.


p/s photos: Lee Ji Ah

Petaling Street Hawkers Calling You Back With Deeper Discount!

Maybank had been due to complete its purchase on Friday of a 55.5% stake in BII, for US$1.5 billion. Maybank stood to lose more than 400 million ringgit if it should walk away from the deal. The regulator "changed" the rules for the deal when it come to approving the deal. The changes alter the deal strategy significantly.

I DID NOT HEAR OF SELLERS THEN OFFERING TO renegotiate the deal, or return the deposit if Maybank wanted to walk away, they held onto the terms of the deal. Since then the share price of BII has fallen enormously. NOW THE SELLERS OFFERED to reduce the deal by 480 million ringgit. The rebate is more than the 400 million ringgit deposit Maybank stands to lose by walking away from the acquisition yesterday.

Moral of the story, how many idiots are running around in this deal? Why do the idiots think there are stupider idiots running around as well in this deal?

Bank Negara had previously blocked the acquisition after Indonesian regulators said Maybank would have to sell part of its stake in the future to comply with new rules designed to raise the shareholdings of Indonesian investors. The central bank then gave the deal the green light on September 16 after Indonesia's capital markets regulator agreed to extend the deadline for Maybank to cut its stake. In the latest move, it told Maybank that the terms needed to be revised – that is, the price reduced – because of turbulence in the global financial markets.

The concern of investors and also Bank Negara Malaysia (BNM) is that Maybank would end up losing a pile if it were to pare down its stake by 20% within two years. This is because it is acquiring the shares at Rp510 while it is less than Rps330 now.

Maybank said in a statement dated Sept. 25 the Malaysian central bank ordered it to reduce the price or scrap the transaction, sparking a dispute with Indonesian authorities and a record slump in Bank Internasional's share price. Temasek said Maybank first asked for a one-month extension and a price reduction on Sept. 24, which it turned down a day later. It was informed of the objections by Bank Negara, or the central bank, on Sept. 25 at 11:32 p.m. local time, it said.

Khazanah Nasional Bhd., Malaysia's sovereign wealth fund, is paying 2.5 times the book value of PT Bank Niaga and three times book for PT Bank Lippo as it buys the remaining shares of the two Indonesian banks in a proposed merger. Khazanah and its unit, like Temasek, are either selling one of the two banks they own or merging them to meet an Indonesian central bank deadline limiting ownership to just one local bank by 2010. (Maybank's purchase price for BII was 4.7 times book value, which was a lot more than the 1.98 times book value of Indonesia’s leading bank, Bank Mandiri, and of Maybank's own price-to-book multiple of 2.3 times.). Bank Internasional's shares traded at 310 rupiah yesterday, compared to the deal price of 510 rupiah.

''You can't do this,'' Achmad Fuad Rahmany, chairman of Indonesia's market regulator, said in an interview in Jakarta yesterday. Renegotiating the price ``will cause losses to investors.'' OH YES WE CAN, just like the way you enforced a "selling down clause" in your approval for the Maybank deal. That clause basically altered the strategic value behind the deal. The deal terms may be agreed upon, but always upon the deal being approved by the relevant authorities. Now the authorities have "materially changed" the strategic value of the deal. Maybank can walk away and lose their deposit. What do you mean "you can't do this", Encik Achmad???

When Maybank was faced with the embarrasing situation of losing the deposit for having to walk away - the sellers DID NOT offer a way out for Maybank, knowing full well that Bank Negara was making life hell for Maybank with the additional clause inserted by the Indonesian authorities. Maybank was getting slammed (correctly) for not tightening the deal terms (e.g. deal off if approval is not gotten from the Indonesian authorities, or if there are conditional "changes" to the deal when being approved by the Indonesian authorities).

Make no mistake, i am not siding with Maybank here - in fact the people responsible for the deal should sent back to school.

So to the buggering sellers offering the 480 million ringgit discount - go fly my wau! Too little too late.

Maybank, take your medicine and walk away, lose 400 million ringgit OK what... but surely SOME BLOODY heads must roll - who were the advisors, who were the legal advisors, who were the managers in charge of negotiating the deal???

Temasek and Kookmin, go find your Alan Bond scalp somewhere else!

... and its a celebratory Raya at Bank Negara after all...

p/s photo: Jamie Yeo

Reassessing Indonesia (Part 1)

Malaysia and Singapore have a unique relationship. We are like squabbling in-laws, but we know we cannot and will never divorce each other.

You live with the tension and exchange of barbs. The ties between Malaysia and Indonesia are quite different. The animosity at times can boil over. Grudges are harboured and allowed to fester. There is a genuine fear of, and sometimes loathing for, each other.

Most of that is at the political and policy levels. Many Malaysians and Indonesians love to visit each other’s country. Indonesia to Malaysians in general, is a bit of an underachiever. Naturally, Malaysia to Singaporeans, is also a bit of an underachiever.

It’s time to reassess Indonesia. In many ways, the country is moving in the right direction business-wise.

Recently, Qatar and Indonesia set up a US$1bil fund to invest in energy and infrastructure. Qatar is the world’s largest exporter of liquefied natural gas (LNG), while Indonesia is third. Both countries are also members of the Organisation of the Petroleum Exporting Countries (OPEC), though Indonesia has just opted out.

Qatar will contribute 85% of the funds for the new fund and Indonesia the remainder. Qatar’s state investment fund, the Qatar Investment Authority (QIA), has teamed up with Abu Dhabi state enterprise International Petroleum Investment Co in March to launch a US$2bil fund.

The QIA has also set up joint funds with Oman and Dubai.

Indonesia is pro-Western, much like Malaysia, and could be a model for a modern Muslim nation, provided nationalist Islam (not radical Islam) doesn’t become too powerful a force in Indonesian society.

Following the aftermath of the Sept 11 attacks, many were outspoken on the various failings of Muslim nations. Indonesia is a dominantly Muslim nation, with the largest Muslim population in the world, but it also has small but strong Hindu, Christian and Buddhist communities.

Malaysia has generally enjoyed a better perception in the eyes of international travellers and global investors.

Indonesia has had to contend with thorny events such as the Bali bombings and the East Timor massacre. If investors are to be influenced just by these events, they would be doing Indonesia and themselves a disservice.

There is still pockets of “nationalistic fervour” among the political voices in Indonesia.

Health Minister Siti Fadilah Supari commented in April that regional governments in Indonesia should be on their guard whenever they dealt with international investment proposals.

She said the following should be considered by provincial governors and regents in respect of foreign investment plans:

· Would the international investors take control of Indonesian resources?

· Would the foreigners be prepared to be on an equal footing with Indonesian partners, or would they adopt a lordly, colonialist stance?

· Would a particular foreign investment benefit Indonesians or harm them?

· To what extent would Indonesians gain from the investment? Foreign investors often lie about this matter.

For example, South Kalimantan’s coal needs were less than 1 million tons per year and there was an electricity shortage crisis. Yet, at the same time, 70 million tons of coal was taken out of the province and sold internationally.

Indonesia has been beset by an autocratic regime for a long time. We need to reassess the country now as the country is certainly moving away from the authoritarian system to a more democratic one.

It is still taking baby steps but press freedom and the media’s brutal honesty and bravery has paved the way for a more civil society. This is an important aspect of a decentralised power system, which accords more voice to a wider spectrum of leaders and the disenfranchised.

Meanwhile, according to an AT Kearney study of the top 25 most attractive investment destinations in the world, Indonesia ranks 21st. The rankings for 2007 are based on a survey of 1,000 CEOs around the world. In 2006, Indonesia did not make the top 25. Thanks to a well-respected Finance Minister in Sri Mulyani Indrawati, there has been significant economic liberalisation.

Quasi-monopolies have not been protected and are expected to compete with new foreign companies.

The boom in commodities over the last five years has helped the country infuse more strength into its underlying economy. Indonesia is at or near the top in palm oil, rubber, base metals, coffee and cocoa.

Sustainability of global investments

Corporate investors across all regions are concerned about the sustainability of the global economic order. Is Indonesia the flavour of the month only because of the commodities boom? I think not, as most experts can see a sea of change enveloping the country.

The commodities boom only hastens the benefits of such changes.

The country is confident enough to implement several years of mandated increases in minimum wages. While some industries may have shifted or closed operations because of these new rules, these measures have also forced investors and businesses to move up the value-add curve.

There has also been a decentralisation of budgetary systems, which has allowed local leaders to better manage resources and spending to their localities.

Over the last three years, Indonesia has managed to enjoy more stability politically, in its currency and in economic viability. This lessens the discount on businesses in valuation models, thus resulting in better confidence among foreign investors going forward.

Corruption is still a problem but one can easily see a more transparent era for Indonesia. More bigwigs have been hauled up and tainted politicians have lost their seats with greater frequency.

Major business entities

Since beginning of 2007, there has been more than US$20bil in mergers and acquisitions and capital raising, which drove the corporate sector to new levels.

The corporate sector is no longer dominated by seasoned players from the Suharto era. If you put the top business groups next to Malaysia, the latter pales in comparison.

The Salim group tops the ladder with US$7.3bil (RM24.8bil) in revenues annually and is in agriculture, distribution, property management, financial services and telecommunications in Indonesia, Hong Kong, China and Singapore.

Next is the Sinar Mas group with revenues of US$4.77bil (RM16.2bil), which was forced to sell Bank Internasional Indonesia (BII) following the 1997 financial crisis but has since rebuilt itself in banking with the acquisition of Bank Shinta.

The Sinar Mas group can be said to have been most affected by the 1997 financial implosion as their Asia Pulp & Paper had a staggering debt load of US$14bil. Following years of negotiations and restructuring, the company has thrived. It is also the biggest national player in palm oil, with land bank of more than 1 million hectares.

I could go on and on, but a summary of local companies with annual revenue of at least US$1bil each would be better for now (major assets/annual revenues):

Salim: consumer goods, agriculture/US$7.3bil

Sinar Mas: pulp and paper, agriculture/US$4.7bil

Djarum: cigarette, Bank Central Asia, Cipta Karya Bumi Indah/US$3.7bil

Gudang Garam: cigarette, plantations, paper packaging/US$3.5bil

Bakrie: coal, Bakrie Brothers/US$3.1bil

Lippo: regional property developer, healthcare, financial services/US$2.7bil

Raja Garuda Mas: pulp & paper, plantations, energy/US$2.4bil

Triputra: coal, agro-industry, manufacturing/US$2.3bil

ABC: consumer goods, battery/US$2.1bil

Saratoga Capital: coal, Adaro, palm oil, infrastructure/US$1.9bil

Para: consumer goods, property, mining, financial services/US$1.6bil

Sampoerna: agro-industry, telecommunications, forestry and property/US$1.4bil

Ometraco: animal feed/US$1.2bil

Khazanah Nasional Bhd has a hefty profile in Indonesia. The businesses under Khazanah has an annual revenue of US$1.8bil. Its stakes include those in Bank Lippo, Bank Niaga, Excelmindo Pratama and infrastructure joint ventures (JVs).

Surprisingly, Temasek’s holdings in Indonesia has only a total annual revenue of US$1.5bil. It has stakes in Bank Danamon, BII, and various property and energy JVs.

Still, the key point here is the number of business entities that have substantial revenues. How many Malaysian businesses have combined revenue of more than RM3.4bil annually? Size matters, especially when they are headed in the right direction with the proper masterplan.

State-owned enterprises (SOEs)

The government has also planned to privatise a number of SOEs, which in itself is a grand plan to better manage resources, inject competition and promote efficiency in government. All in, 37 SOEs have been identified for privatisation and/or restructuring. There has been some delay in that certain factions of the government have been delaying the process.

Last year, 10 SOEs were scheduled for privatisation. However, only five are now ready to go to IPO this year: Krakatau Steel, Bank Tabungan Negara, and National Plantation Enterprises III, IV and VII. Needless to say, intense lobbying by the affected SOEs and maybe even “vested interests” must have been a large part of the delay.

Still, it’s hard to deny that the country is moving in the right direction.

p/s photo: Son Ye Jin