Puzzling switch of investment banks

AT a time when investment banks are fighting for advisory work in corporate deals, it is rare that they withdraw from such work after having spent some time on the proposals.

It is even more unique that when one top investment bank withdraws, another replaces it as adviser.

This is the case with Goodway Integrated Industries Bhd, a loss-making company that has proposed to move into the security technology business with the proposed acquisition of S5 Systems Sdn Bhd from NSA Technology Sdn Bhd for RM900mil to be paid for in shares.

The proposal was made in July last year, and six months later, Maybank Investment Bank Bhd submitted the relevant documents to the Securities Commission.

Last week, Goodway Integrated announced that it had withdrawn the proposal due to additional time needed to enhance disclosure and provide the required information. It also stated that Maybank Investment Bank and the company had mutually agreed for the services of the investment bank to be terminated with immediate effect.

In the same announcement, Goodway Integrated announced that CIMB Investment Bank has now been appointed as principal adviser for the deal, and that it would endeavour to resubmit the proposal within two months.

Why would Maybank Investment Bank withdraw from the deal after having worked on it for more than six months? What additional disclosure is required for the proposal to be withdrawn?

The injection of S5 Systems is a complex deal that involves the issuance of new shares, the placement and sale of shares, and a scheme to reward employees.

Goodway Integrated‘s current business of manufacturing rubber compounds, providing retreading services, rubber trading and property development is supposed to take a backseat. The loss-making rubber-related businesses have dragged the company into the red in the last two years.

S5 provides a range of high-tech security services and solutions to Government bodies and companies. If the proposal goes through, then Goodway Integrated could count itself in the league of My EG Services Bhd and Datasonic Group Bhd.

However, for the deal to go through, it first needs the necessary approvals.

 

Petronas’ dividends

THE issue of how much dividends Petroliam Nasional Bhd (Petronas) declares to the Government is always a hot topic. On the one hand, the Government feels that its wholly owned oil and gas giant should always strive to pay out as much as it can. On the other hand, Petronas’ leaders have sought to make the point that its profits ought to be reinvested.

The June 2014 oil price meltdown complicated matters more. With lower earnings, it is only logical for Petronas’ dividends to its shareholder to decrease. That said, it was reported last year that for Petronas to maintain its dividend, notwithstanding a slump in earnings, it may need to raise some borrowings.

Using debt to pay dividends is unusual, but not an entirely alien concept. Some companies such as some local listed telecommunications companies have opted for this route as a means to extract value from their balance sheets to reward shareholders. Petronas’ profits fell by more than half in 2015 largely due to the oil price collapse. Still, it paid out a dividend of RM26bil to the Government, only RM3bil lesser than in 2014.

But when Petronas’ 2016 profits dipped again by more than half, it finally managed to get the green light to drop its dividends to a mere RM16bil.

The national oil corporation has committed an RM13bil dividend commitment to the Government this year, its lowest since 2007.

In this context, the recent statement by Petronas’ chairman Tan Sri Mohd Sidek Hassan is suprising.

Earlier this week, he said that the national oil company might be able to review the amount of dividends it pays the Government, following the increase in Brent crude oil prices. Perhaps this is to do with the oil prices, which have gradually risen in recent months.

In Budget 2017, the Finance Ministry benchmarked the oil price at US$45 per barrel and oil prices are now trading around US$55 per barrel.

Taking a leaf out of Norway’s book

THE way Norway manages its oil and gas (O&G) resources is remarkable. It has diverted all the money from its O&G resources into a fund that invests in assets around the world.

The Government is only allowed to take up to 4% of the fund each year, which is about the real returns from the investments of the fund. The money is to help the Government fund its budget.

Last year, after a steep drop in crude oil prices and to weather the slow global economy, the central Government took additional money out of the fund than what was paid. The move came under fire from various policy makers and the central bank that warned politicians to stop spending the fund’s resources.

Now, there is a proposal that the Government be only allowed to take up to 3% of the fund.

The objective of putting all the revenue from O&G into a fund that spreads its investments over equities, bonds and other asset classes is to ensure that the Norwegian Government has a sustainable funding plan for its budget. At the moment, O&G revenue makes up 20% of Norway’s budget.

Going forward, the US$900bil fund, which is the biggest in the world, is putting more money into equities this year. It is raising its asset allocation from 60% to 70% into shares around the globe.

Fund managers have already described the move as significant for global markets, as the fund is estimated to own an average of 1.3% of every listed company. The Norwegian fund, that has an investment horizon of up to 100 years, is adopting the approach to increase its returns.

So, what does this mean for the equities market in the other parts of the world? It surely cannot be bad.