Flashback On Lion Diversified's RPT Transactions

With Lion Diversified is losing much money (see A Quick Look At Lion Corp And Lion Diversified's Earnings), I thought revisit some older postings on it.

One issue that stood out was the Related Party Transactions (RPT)!!

In the posting: Megasteel And Lion Corp And Lion Diversified

• A wholly-owned subsidiary of the Company, Limpahjaya Sdn Bhd, has disposed of 66,666,667 ordinary shares of RM1.00 each in Megasteel Sdn Bhd ("Megasteel"), representing approximately 11.1% of the existing issued and paid-up share capital of Megasteel to Lion Diversified Holdings Berhad for a cash consideration of RM100,000,000.

A related party transcation where Lion Diversified bought shares of Megasteel from Lion Corp for 100 million.

And what's wrong? Well Megasteel is in trouble! See How Deep A Trouble Is Megasteel In?

A 100 million related party transaction which did no favours for Lion Diversified!

In the posting: Detecting Companies' Malpractices

• “Avoid companies that have dabbled with related party transactions or have been involved in buying over family-related companies. The company may do it again. Sometimes a leopard doesn’t change its spots,” he says. (he = Choong Khuat Hock, Kumpulan Sentiasa Cemerlang head of stock research and partner)

Now did this leopard change its spots?

Well.. flashback June 2008, the following was blogged: Lion Diversified Acquisition of Subsidiary at RM61.55 million!

Here's the posting in full again.

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Lion Diversified announced last night it was acquiring a subsidiary. In local lingo, it's a Kaki-Lang type of corporate exercise. Here is the temporary link to the announcement. ACQUISITION OF A SUBSIDIARY

• The Board of Directors of Lion Diversified Holdings Berhad ("LDHB" or the "Company") wishes to announce that LDH Trading Sdn Bhd, a wholly-owned subsidiary of the Company, had on 25 June 2008 completed the acquisition of the entire issued and paid-up capital comprising 3,000,000 ordinary shares of RM1.00 each in Banting Resources Sdn Bhd ("Banting Resources"), a company incorporated in Malaysia, for a total consideration of RM61.55 million ("Acquisition of Subsidiary"). Hence, Banting Resources became a wholly-owned subsidiary of the Company.
  
  Banting Resources, a company incorporated under the Companies Act, 1965 on 26 September 2006, is a property investment company with an authorised capital of RM10,000,000.00 comprising 10,000,000 ordinary shares of RM1.00 each and an issued and paid-up capital of RM3,000,000.00 comprising 3,000,000 ordinary shares of RM1.00 each.
  
  The Acquisition of Subsidiary is not expected to have a material impact on the earnings of the LDHB Group for the financial year ending 30 June 2008 and, on a proforma basis, is not expected to have a material impact on the audited consolidated balance sheet of LDHB as at 30 June 2007.

Here are some of my comments.

1. This is an acquisition which has been completed. It's not a proposal.

2. It's wholly owned subsidiary, LDH Trading Sdn Bhd bought the entire stake in, Banting Resources Sdn Bhd for a total consideration of RM61.55 million.

3. Rm61.55 million and this company doesn't even have the decency to show detailed information of this acquisition. Questions that I can think of.

• a. Is the purchase price fair or is it the purchase price exorbitantly high?
• b. What it the track record of Banting Resources?
• c. What kind of Balance Sheet does Banting Resources have? Is it highly in debt?
• d. What does Banting Resources do?
• e. Who are the exact shareholders in Banting Resources?

4. If you look at Lion Diversified historical announcements, why are they constant acquisition of subsidiary? I mean seriously, is Lion Diversified in the business of buying its own companies?

5. Here is the link to Lion Diversified last reported quarterly earnings. Quarterly rpt on consolidated results for the financial period ended 31/3/2008 (You will note some drastic increase in trade receivables - and did you see that LionD has investment in quoted securities totalling a massive 237 million?? Wonder what securities man!). In the Balance Sheet, Lion Diversified is noted to have 199.547 million in its piggy bank and with debts totalling 480.681 million. As it is, based on this purchase would cause Lion Diversified to be even more in debt.

Ah, but that's not all.

Let me highlight just a couple the many, many proposals that I saw in its historical announcements. Well there is one proposal where Lion Diversified is purchasing land in China for some 151 million.

And then there is their massive BLAST FURNACE IRON-MAKING FACILITY which is valued at 1.62 Billion!

Wasn't Lion Group a group of company which almost sank a decade ago due to overly aggressive expansion and massive borrowings?

5. Try google the exact phrase "Banting Resources" and see if you can get more info on this company.

How now brown cow?

Do you like what you see or are you simply disgusted?

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Some of the comments posted:

The Great Game said...
If I am not mistaken, RPT needs no special approval from shareholders provided it is below the 5% threshold (NTA, Revenue and Profit).

Fair enough, ethically what Lion Diversified has done was not right. But it seemed like this RM61.5 million was not a material sum to Lion Diversified, so what's the catch here?

But hey, again Warren Buffet did use Berkshire's funds to purchase a private jet for his personal use (before he bought the aircraft leasing company), right?

In the last financial crisis, William Cheng was the second largest debtor in Msia, after Halim Saad/ Renong Group with some RM 20 billion.

He had earned a solid reputation after he repaid every single cents he owed. He is one of the very few, if not the only one who did not seek for a haircut from his lenders. He is a man of his words. It's hard to find corporate chieftain of his integrity now and then.

11:46 AM
Moola said...
Dear Great Game.

Many thanks for your views.

My main issue here is on Lion Diversified acquisition of a subsidiary done on a whopping rm61.5 million and the company showed no respect to their shareholders by not providing any financial details of Banting Resources.

This is an acquisition of a subsidiary.

LionD has simply got to show the justifications of this aquisition and the price involved!

What they have done here as you had admitted is simply not correct.

And I am simply baffled by your statement in regarding Warren Buffett into comparison.

Why the need to divert from the main issue?

12:27 PM
The Great Game said...
Dear Moola

Wow. Geeks. Your response is fast. I agree that Lion should, at the very least, publish more info on Banting Resources, although it is a fait accompli.

My point is that there's always a systematic exploitation of minority shareholders as long as this 5% -10%-15% threshold rules is still around. To me the key issue here is the materiality of this transaction, of which this 62 millon does not even trigger any of the threshold required by Bursa.

Now I re-read my previous comment,my WB exmaple is indeed quite baffling. Apologies on that score. I was just trying to make a point that there's nothing wrong to "short change" the shareholders as long as it is well within boundary and they still deliver the results. I am not saying this 62million is small, but in Lion's case, it is immaterial.

To one extreme, it's like saying I cant use my company car to drive my kids to school?

Frankly I have not been following on Lion Group (and now called Lion Diversified or who-know-what). But this dubious transaction (at 62 million) is a drop of the ocean compared RM 20 billion debt that Lion has resolved. That, of not running away from the 20 billion debt, to me, is the ultimate courage and integrity in Msia corporate world.

2:41 PM
Moola said...
Dear Great Game,

I was just trying to make a point that there's nothing wrong to "short change" the shareholders as long as it is well within boundary and they still deliver the results.

==>

I am truly disappointed.

How could it ever be NOTHING WRONG TO SHORT CHANGE???

A crime is a crime is a crime.

And less us not forget, this is a 62 million rip-off!!!!!!!!!

3:13 PM
TOTOMASTER said...
okok.. take it easy moo moo... let me go buy up 5% of liondiv n let me hantam them kau kau next time they do the same thing again...

hahaha...

9:45 PM
Moola said...
Dear Totomaster,

I am so baffled.

Care to share what's so funny?

Aren't you even disgusted at what's happening?

9:56 PM
The Great Game said...
No offence, I was just merely rambling on my thoughts. Apologies if you are offended by any of my comments.

With regards to your comment, I am a realist and I just couldn't find any other listed companies on KLSE who are not exploiting this 5% threshold rule. Unfortunately this is just the corporate world that we are living in (I wish I am wrong!).

Why is Lion allowed to complete this transaction without even notifying its shareholders? What's the legal protection/ remedy for the minority shareholders? What should be done to ensure these type of dodgy transactions do not happen in the future?

So to me, the bottom line is as long as the management keep delivering, they could (of course preferably not as it is ethically not correct) contemplating some curry-favour transactions.

Again, this is just my 2 cents. Please do not take it personal.

3:06 PM
Moola said...
Dear Great Game,

So to me, the bottom line is as long as the management keep delivering, they could (of course preferably not as it is ethically not correct) contemplating some curry-favour transactions.

==>

I am truly baffled at your reasoning.

That the company is required to perform as public listed company is a must.

That the company is already paid well as a listed company.

So what gives the company divine rights to such corportate exercises, where the company can acquire their OWN subsidiary for such a large sum of 62 million ringgit?

3:30 PM
The Great Game said...
Fair point. There is definitely no divine right for Lion to engage in this transaction ethically speaking; but neither are they prohibited to engage in this legally.

That the company is required to perform as public listed company is a must. -> Agreed, but in reality I think most businessman tend to think of the stock market as a place to 'cash out' or a ATM machine.

That the company is already paid well as a listed company. -> I supposed there's no limit to a man's greed.

I could be wrong, and I do not mean to incriminate. At the surface, this is a clear 62 million rip-off. But Msian businessman have a lot of ''lobbying'' to do. And these funds usually have to come from some dodgy transactions like this. This transaction could also simply just for personal pleasure of the major shareholders. We could never be sure of his motive.

Strangely enough, his means to whatever ends he might have is legally endorsed.

The key point i think we should recognise is that this transaction is not material enough to make a drastic impact to the company; otherwise it would be obliged under the listing rule to make all proper announcements, seek approvals, etc.

4:34 PM
Moola said...
Dear Great Game,

The key point i think we should recognise is that this transaction is not material enough to make a drastic impact to the company...

==>>

Huh?

I really am so baffled.

Your very first comment was "Fair enough, ethically what Lion Diversified has done was not right.."

But yet ... you are trying so hard to justify this transaction.

Not right equals wrong, yes?

And wrong is wrong is wrong.

4:51 PM
Seng said...
Interesting exchange.

My 2 sen worth.

1. Materiality.
We must be very careful when applying this "materiality" argument.

In a quick and dirty valuation of stocks, it is practical and good to ignore immaterial factors so as to be able to focus on the key issues.

But let's not confused this "materiality" argument with actual running of a company.

To say that "siphoning" 5% or 3% or even 1% of whatever measure is acceptable because it is not material is plain wrong.

Siphoning via legal means is morally wrong.

And shareholders - as owners of companies - want management who will always act in shareholder's best interest.

Period.

It is important we understand clearly the 2 completely different concepts of materiality.

2. The Reality.

Yes, there are some businessman who has no problems exploiting this loophole.

That is current reality.

Is that necessarily future reality?

Maybe. Maybe not.

Whether it continues in the future depends very much on whether we - as stakeholders - accept this behaviour or not.

I will put my foot down and say I don't accept it personally.

If every company management can "siphon" money off for personal gains, Bursa will be in trouble!

The argument that 1% is small and immaterial is irrelevant.

Keep doing 1% each week, and by the end of the year, 50% could have been gone!!!

3. This specific case.

I personally wouldn't say there is sufficient evidence of siphoning.

Instead, I think what we have is a situation of NOT having enough information.

And that alone is sufficient to create a strong level of distrust, based on his past records.

I don't deny he's done good things. But we cannot deny, he's done many shady things too.

And prudence suggests that we - as minority shareholders - should be very careful as investors.

Safer - me thinks - not to be an investor or a business partner that we cannot trust. After all, if you are a minority shareholder, do you think he cares about your best interest? If not, why be a long-term investor?

Seng.