Frequently Asked Questions

Transcription

1 Frequently Asked Questions Deal origination 1. How did this deal come about? Sime Darby had embarked on a 5-year strategy roadmap for each of its six divisions after June This roadmap outlined, among others, a strategy to expand into related businesses and penetrate new growth markets. For the Property Division, Sime Darby has decided to expand its property business and the type of products it can offer in the property development and hospitality sectors beyond the Greater KL region, specifically in Penang and Johor. As such, the Group has been actively on the lookout for potential opportunities. When the opportunity to acquire a stake in E&O came, Sime Darby acted decisively as this was a logical step to strengthen its market position in line with the strategic thrust for the property division to extend its presence. 2. What attracted Sime Darby to E&O? The geographical presence in Penang and Johor (Iskandar). It has formed a joint venture with Temasek Holdings and Khazanah for development in Iskandar. Medini is actually on prime land in Iskandar. Overnight, Sime Darby has presence in three hotspots Klang Valley, Penang and Johor. 3. Sime Darby s move to buy E&O has become controversial. Did Sime Darby foresee such a development? No, when we decided to take the 30% stake in E&O, we saw it as a straightforward deal and good for Sime Darby. 4. Was Sime Darby pressured to buy the stake in E&O? There was no pressure to do the deal. We believe management should behave and act professionally when making such decisions. Valuation 5. Is the purchase price of RM2.30 fair given its relatively high implied price to earnings ( PE ) ratio of approximately 19 times? We must emphasise that the market share price is not reflective of the value of E&O. In valuing a property development company, the realisable net asset value (RNAV) method is the more appropriate valuation method compared to the P/E or any other share price multiple methods. The purchase price of RM2.30 represents a discount of approximately 20% to the realisable net asset value (RNAV) of E&O (average of RM2.91/share). Sime Darby is of Page 1 of 8

2 the view that the purchase price is fair (the UEM-Sunrise deal was also concluded at about 20% discount to the RNAV). Other stakeholders in the market place have paid similar premiums for strategic stakes, only to see investee share prices more than double years later. We look at E&O and we say it is an excellent price. It cannot be based on the last transacted price, but on the fair value. We have to look at what is in store for us by holding the E&O stake and how we can leverage on what they have and pass on the benefits to the Group. It could be technical skills or using E&O s platform for overseas developments. We can always suggest ideas or do joint ventures. There are so many things that we can do jointly under the collaboration agreement. Besides, E&O also owns a hospitality business, the iconic Eastern & Oriental Hotel, which is already worth a lot. We have our own thoughts on how to extract value by owning a stake in E&O. A lot is dependent on value creation within the company. We are comfortable with the price and we are going in as a long-term investor. 6. Premium paid was 60% (RM2.30) higher than closing price (RM1.45) and without controlling interest because valuation was based on 20% discount to Realisable Net Asset Value (RNAV). But how was RNAV estimated and how long will it take for this asset to be realised? The RNAV of E&O was computed based on available information of E&O s landbank, corroborated by various analyst reports issued in 2011 of around RM3.2bn. These estimated RNAVs exclude any additional value from future synergies and benefits that may be derived from the collaboration between our two companies. DBS Vickers Securities: RM3.3bn CIMB Research: RM3.2bn Kenanga Research: RM2.4bn (Excludes the Seri Tanjung Pinang 2 project and thus arrived at a much lower estimate) The acquisition was done based on the merits of E&O and the opportunity to acquire a strategic stake in E&O from the shareholders. Examples of E&O valuations in 2007: E&O Property Development Bhd share price peaked at RM4.20 with a market capitalisation of RM2.8bn. Credit Suisse research report (dated 26th Nov 2007) cited E&O s Property Development Bhd RNAV at RM5.23/share or RM3.5bn. The valuations done in 2007 on the property development arm of the E&O Group was conducted at a time when launches were just taking off and landbanks were being nurtured. Seri Tanjung Pinang Sales were reaching RM700m Brand recognition was being reinforced through joint-ventures with the likes of CIMB Maple Tree & Al-Salam Bank Today, E&O has progressed to become well-known as an established premier property brand with a niche positioning in the Malaysian market. Page 2 of 8

3 Successful partnership with Lion Group (St. Mary development) New collaborations and recognition emerging from Mitsui Fudosan, Temasek & Khazanah, further boosting the brand In addition, E&O is still working on the same core landbanks (vis-à-vis 2007), except that they are more matured in terms of launches and development approvals. o o o Seri Tanjung Pinang sales soared to RM2.0bn Unbilled sales of the property development division reached all-time high of RM900m New areas of growth have also been identified Iskandar, Johor All the above have excluded the valuations of hospitality, lifestyle and property investment division (E&O Hotel, Lone Pine Hotel, the Delicious Group, Straits Quay retail marina, Tesco, Dua Annexe and St Mary retail), hence it will only add to the valuation of the overall Group. Value of E&O is also underpinned by its management led by Dato Terry and his deputy managing director, Eric Chan. It is important to note that the value of the deal is in the long-term potential, with the assets expected to be realised in the medium to long-term (~5 to 10 years) horizon. Given the vast land bank of the Sime Darby Group, it is further expected that as opportunities of mutual benefit are identified, E&O may work in joint venture with Sime Darby to enhance the velocity of development of both E&O and Sime Darby properties. Going forward we see further value from synergies between our two businesses, creating incremental value for both E&O and Sime Darby shareholders. 30% stake and potential Mandatory General Offer (MGO) 7. Why Sime Darby did not do partial offer to all E&O shareholders, instead of buying from 3 major shareholders and deprive other shareholders of the opportunity? As reported by the media, the E&O block has been on the market for some time and that the shareholders who were willing to sell were also publicly mentioned in the media. Thus, this was a strategic decision that was made to ensure that Sime Darby obtained a sizeable block in E&O. Going to the market would have taken far more time and probably caused the price to spiral. Also that would not have given us any guarantee that the vendors would not have found another buyer. It was also reported that several parties have been competing to acquire E&O. We see value in E&O and when the opportunity arose, we acted decisively to acquire the stake as a logical step to strengthening our market position. Now with Sime Darby s involvement, there will be numerous opportunities to create value for all shareholders in the mid to long term. 8. Who are the other parties interested to acquire E&O stake? Was there element of competitive bidding involved to secure the stake? To the best of our knowledge, we are not aware of any formal approaches for the E&O stake except for ourselves. However, the media reported that there may have been other property developers that were interested: Page 3 of 8

4 Business Times (29 July 2011) SP Setia eyes E&O The Edge Weekly (1 August 2011) Corporate: A game of chess at E&O 9. Minority shareholders of E&O are said to be losing out in the deal, while major shareholders walk away with huge premiums following Sime Darby s share acquisition. It is important to note that the 3 shareholders of E&O (Dato Tham, G.K. Goh and Tan Sri Wan Azmi) have not exited E&O and remain as E&O s shareholders. Upon the completion of the Share Sales Agreements, the E&O equity interest for the following shareholders are as follows: Dato Tham - 5.1% G.K. Goh 3.5% Tan Sri Wan Azmi 2.9% When we were first made aware via the media of the opportunity to acquire a stake in E&O, we acted decisively as this was a logical step to strengthen our market position in line with the strategic thrust for the Sime Darby Property division to extend its presence. As reported by the media, the E&O block has been on the market for some time and that the shareholders who were willing to sell were also publicly mentioned in the media. Thus, this was a strategic decision that was made to ensure that Sime Darby obtained a sizeable block in E&O. Going to the market would have taken far more time and probably caused the price to spiral. Also that would not have given us any guarantee that the vendors would not have found another buyer. It is normal for acquirers to pay a premium for larger stakes that come with a level of certainty, rather than accumulating smaller stakes with lower certainty of achieve ones objectives. With Sime Darby s involvement, there will be numerous opportunities to create value for all shareholders in the mid to long term. E&O will also remain independently run, with management and the majority of the board will remain unchanged. Dato Terry Tham will remain as E&O s Managing Director and will continue to build and develop capacity in E&O to ensure succession planning. 10. Will Sime Darby be required to undertake a mandatory general offer ( MGO ) pursuant to the Malaysian Code on Take-Overs and Mergers, both within the letter of the law as well as the spirit of the law? Sime Darby is acquiring this non-controlling 30% stake as a logical step in strengthening its market position. As Sime Darby does not have management control, it has not triggered a requirement to undertake an MGO. Sime Darby wishes to reiterate that it is not acting in concert with any of the vendors of the E&O shares. 11. Should regulator decide that the transaction require MGO, would Sime Darby do it? Will it have the resources to complete the exercise? We will cross the bridge when we come to it. We are pleased with our investment at this level, but of course, depending on market conditions and circumstances, reserve the right to trigger a general offer at a later date through open market purchases. Page 4 of 8

5 However, if Sime Darby is required to undergo the MGO exercise by the authorities, we firmly believe that we have the balance sheet strength to complete it. 12. What is Sime Darby s view on MGO and the interest of minorities? Maybe at the right time, that could well be the outcome. For now, we have not done anything unlawful or illegal. We did not do anything that was tantamount to having to make a general offer. We followed the law and procedures. We emphasise that the minorities do not lose anything because the values of the company are still there. 13. From the outset, Sime Darby s intention was to acquire 30% only? We took the view that we would hold 30% first. To make a GO without the benefit of due diligence is not a wise thing to do. It is better to have one foot in the company to get the feel of it and at the appropriate time, if we want to do a GO, we will consider it then. We do not intend to change the management. We have made it one of our express requirements that we work with the current MD, Dato Terry Tham, who has to be around for at least the next three years. There is also a possibility that he will remain beyond that time frame. But should he decide to leave, Eric Chan is more than capable to take over. Ultimately, we would like them to continue to do what they are doing, a smooth transition. We have to be realistic about it. We need the talent to run the company as it is now. 14. If a new substantial shareholder were to emerge at E&O and trigger a MGO, what would it mean for Sime Darby? We are aware of the rumours but they have yet to be proven true. We have looked at a few scenarios. We will come up with our next move if that happens. Structure 15. Without a clear controlling interest in E&O, how does Sime Darby plan to safeguard its investment? We must emphasise that we do not need majority control to benefit from this deal. The 30% stake is a good starting point for both companies to explore each other's potential over the next 2-3 years. The 3-year collaboration agreement between E&O and Sime Darby was designed to ensure that both parties successfully capitalise on our different strengths and expertise. It opens up further potential for each company to leverage each other's strengths. Objectives of the collaboration agreement are as follows: The sharing of knowledge and expertise; The leveraging on each other s respective core competencies; and Where mutually identified and on agreed terms, the exploitation of economic opportunities jointly. The collaboration agreement envisages collaboration in the following areas: Page 5 of 8

6 Technical capability and innovation cross-fertilisation of knowledge and experience to bring new products to market, through: o staff secondment; and o cross-sharing of R&D processes and competencies to improve existing processes and create new products to bring to market Joint ventures and marketing & strategic alliances to: o increase brand value and presence; and o develop new growth engines from existing and new markets, including international expansion jointly and/or through strategic alliances with other global or regional property companies Accelerating value through the joint development of each company s landbank. Sime Darby Property will second some of its staff to be exposed to E&O s operations and the rigours of the market place. 16. What level of Board representation is Sime Darby looking at in E&O? There are no plans to change the composition of the Board of Directors of E&O, save for the nomination of non-executive representatives in line with Sime s shareholdings in E&O. Such representatives will be approved by the existing Board of Directors/shareholders of E&O similar to any other nominated representative by any other shareholder in accordance to the Memorandum and Articles of Association of E&O. Strategy 17. Why didn t Sime Darby choose the option to directly acquire land and engage in property development activities outside the Klang Valley (i.e Johor and Penang)? The scarcity of suitable land bank on Penang Island made it feasible for Sime Darby to acquire a strategic stake in a company that already has such assets. The acquisition of E&O brings with it not just land bank, but also a level of unique talent, branding, experience and expertise in a niche premium property development in these regions. By acquiring a strategic stake in a reputable and successful company, Sime Darby can enjoy a head start on several key projects with a lower risk profile. 18. Sime Darby is already a strong brand in property development. Why does Sime Darby need E&O? We are a firm believer in entrepreneurship. GLCs must be commercially oriented, and we need to create a talent pool to drive the GLCs. Businesses that are driven by individual entrepreneurs are run differently. This is precisely why we see value in companies like E&O, SP Setia, Mah Sing and Sunrise the people running these companies are entrepreneurs with strong reputations, and we want to ride on them. The acquisition provides an opportunity for Sime Darby to acquire a strategic stake in a E&O which would not only give access to land bank in Klang Valley, Penang and Johor but also access to E&O s unique talent, branding, experience and expertise as a niche Page 6 of 8

7 premium property developer. Without E&O, Sime Darby would have to build such capabilities from scratch which would consume a disproportionate amount of time and resources. The E&O stake also adds a fresh range of products that are not traditionally available in Sime Darby's current product range. Improvement in product mix would enable Sime Darby to improve its profit margins and GDV per acre. For example, as a township developer, the average industry profit margins is only around 20%-25%, while that for niche developments can reach in excess of 30%. In addition, the average GDV for township developments is around RM2.75mil/acre but this can rise to over RM100mil/acre for niche/high rise developments. The acquisition and collaboration agreement also provides a platform for Sime Darby to expand its reach into regions which Sime Darby is not present, in line with its growth strategy. The sharing of knowledge and expertise between the 2 groups is expected to further enhance the capabilities of Sime Darby s property division as well as the velocity of development of Sime Darby s properties making it a stronger company and ultimately enhancing shareholder value. 19. What kind of management expertise and core competencies E&O has that Sime Darby does not have? Can t Sime Darby hire the best brain and experts? It is always easier said than done. It is not just about one or two individuals. It is an entire business culture and how the management should position itself. GLCs have the fallback position of a more secure environment. Businesses led by entrepreneurs have a different thinking and approach to bottom line and extracting maximum values. The entrepreneurs are buying up available landbank, forming Joint-Ventures and not restricting themselves to a certain growth rate. The end game is viewed differently by both sides. We would like to transplant that sort of thinking here, to get our people all fired up and scale new heights. 20. Is there a real need on the part of Sime Darby to increase its land bank when it already has 150,000 acres of underdeveloped landbank to develop for the next few years? How does that fit in with the acquisition of E&O? We would like to dispel the notion that since Sime Darby owns a huge landbank, it must focus on developing. We should not shackle ourselves to the landbank we have. Another approach that we can take is to go out and identify other people s landbank that are strategic and take advantage of market opportunities. The issue with our landbank supply chain, mainly estate land, is they are really more favourable for township development. We do not focus on niche development, for example, developing a tract of land in the city centre or doing high-end premium development. 21. Where does the Sime Darby Property brand fit into this new approach? We are looking at two brands now. The acquisition will allow us to build two strong property brands with different strengths. Instead of being confined to our own landbank and property product segment, the 30% stake will allow us to gain expertise in higherend property products. Page 7 of 8

8 22. Is there upheavals within the Sime Darby group on the share purchase deal and the changes that Sime Darby want to put in place? We are not revamping the structure of Sime Darby s property division. We cannot expect results overnight, but over a period of time, there will be improvement. We think that the potential is not fully exploited. We have to go out to look for strategic partners and look regionally to grow our business. We can t do it alone, there are certain inherent requirements. 23. Going forward, is Sime Darby looking for more such tie-ups? We know what we want to do. For the plantation division, we are looking at two or three strategic tie-ups, which will be announced in due course. This will happen in different levels of the plantation division and other divisions as well. For property however, we will work with E&O for now. 24. Is the acquisition in line with the Government s GLC Transformation Programme? One of the key principals of the Government-Linked Company (GLC) Transformation Programme is enhancing the performance of the GLCs. The Programme also takes full cognizance of matters relating to governance, shareholder value and stakeholders management. The acquisition provides an opportunity for Sime Darby to acquire a strategic stake in E&O which would deliver the principles of the Transformation Programme. Page 8 of 8