How quickly interest dies

  • Opinion
  • Saturday, 17 Dec 2016

  • Optimistically cautious

TALK about blowing hot and cold. After just five days, Government-owned Felcra Bhd has apparently lost interest in a possible reverse takeover of troubled KUANTAN FLOUR MILLS BHD.

And that loud whoosh you heard was the sound of KFM’s market capitalisation deflating rapidly – the share price took a 61% dive yesterday – when Felcra pulled out of the dating game.

But was there much of a courtship in the first place? It’s hard to tell because the KFM announcements to Bursa Malaysia weren’t brimming with details.

We can try reading between the lines. It’s a poor substitute for solid information, but how else do we fill in the blanks when there’s insufficient clarity on the episode?

On Tuesday, KFM said Felcra had issued a letter on Dec 9 expressing interest in exploring the possibility of participating in KFM’s equity.

There’s a lot of tentativeness in this combination of words. The so-called letter of interest is nothing more than an overture. It is perhaps more like an “I think you’re cute” note passed shyly and discreetly in back of the classroom.

However, it’s also worth noting that KFM in fact said it had “secured” the letter from Felcra. Does that mean KFM had been persuading Felcra to step in as a suitor?

We don’t have an answer to that, but we do know what Felcra had in mind if things had worked out between the two companies.

The plantation player was looking at injecting “suitable profit-generating assets” into KFM in a reverse takeover, turning around KFM’s existing businesses and freeing KFM from PN17 status, a mark of financial distress.

Ultimately, these moves were meant to bring returns and value to Felcra, whose sole shareholder is the Minister of Finance (Inc).

Felcra has been talking about floating its shares for several years already. KFM’s announcement suggests that Felcra is taking a step closer to that goal, but via a backdoor listing instead of an initial public offering.

KFM slipped into PN17 status about a year ago because its shareholders’ equity is less than a quarter of its paid-up capital. The company has stopped its flour milling operations a few months ago due to “severe cash flow situation and prolonged loss position”.

And it has until Dec 28 to submit to the authorities a plan to regularise its financial condition. If not, trading in its securities will be suspended.

The stock needs a boost fast, and the market can’t help but love the idea of Felcra as the white knight. Naturally, the share price soared after the KFM announcement on Tuesday, never mind that it was four days after receiving the letter.

The investors were prepared to overlook the fact that there was nothing firm on which to bet.

Felcra pointed out that its letter wasn’t an offer and that any deal is subject to a feasibility and viability study, due diligence, and a bunch of approvals.

This is a standard caveat in business, and indeed, there have been many cases of proposed deals (including those announced by listed companies) failing to materialise because the parties couldn’t agree on the terms.

But what’s unusual about Felcra’s decision to walk away from KFM was how swiftly it was made.

The letter of interest was supposed to be valid for six months, but in a Dec 14 letter to KFM, Felcra said it was no longer interested in participating in KFM’s equity.

According to Felcra, this came “after urgent deliberation”.

In response to the stock exchange’s query on the reasons for the retraction of the letter of interest, KFM yesterday said it was seeking clarification from Felcra.

Meanwhile, Felcra’s abrupt change of heart leads to questions about what should be disclosed and how unlisted entities have an impact on the stock market.

Bursa Malaysia’s listing rules require a listed company to “disclose to the public all material information necessary for informed investing and take reasonable steps to ensure that all who invest in its securities enjoy equal access to such information”.

But the listing requirements do provide for exceptional circumstances where disclosure may be temporarily withheld.

An example is when “the facts are in a state of flux and a more appropriate moment for disclosure is imminent”. Does this apply to the KFM case?

Felcra stating in black and white that it’s considering using KFM as a listing vehicle may well be material information, but what’s the legal status of a letter of interest?

Why is it that we rarely hear other listed companies talking about letters of interest?

Is the mere registration of interest highly preliminary and that there’s much more to happen before negotiations can start?

And let’s look at Felcra’s role.

For a company that has had listing in its sights for years, it appears to be unenlightened about the responsibility that comes with being connected with the possible rescue of a struggling listed company.

The company should know that KFM shares would get plenty of attention the moment news emerges that Felcra is in the picture.

Did Felcra agree to KFM publicising the letter of interest? How come Felcra was so quick to dismiss KFM as a target?

Given that the retraction of the letter may hinder KFM’s ability to formulate a regularisation plan, will Felcra be open about its latest decision?

Felcra need not wait to be listed before showing that it’s comfortable with transparency and stakeholder engagement.

Executive editor Errol Oh needed a lot more than five days to decide whether to buy a new smartphone.

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