Wednesday, January 06, 2016

Only a clarification from 1MDB over the actual price paid for a 60% stake in BMSB could leave Malaysians and the financial community more confused than ever before

Finally, after a full day of confusion, 1MDB issued a statement late morning yesterday to “clarify” the actual price paid for the 60% stake in Bandar Malaysia Sdn Bhd.

The initial confusion arose because 1MDB announced that

The Iskandar Waterfront Holdings (IWH) – China Railway Engineering Corporation (CREC) Consortium has valued 100% of the Bandar Malaysia land at RM 12.35 billion. Accordingly, its 60% share of land will cost RM7.41 billion. 1MDB will receive a 10% deposit of RM741 million upon execution of the Share Sale and Purchase Agreement, with completion of the transaction expected by end June 2016.

On the other hand, China Railway Group announced to Hong Kong Exchange (HKEx) that

On 31 December 2015, the Joint Venture entered into the Share Sale Agreement with 1MDB Real Estate (1MDBRE), pursuant to which the Joint Venture will purchase 60% of the equity interest in BMSB held by 1MDBRE at a price of MYR5.279 billion…

From 1MDB’s announcement, it appears that 1MDB will be paid RM7.41 billion, but from China Railway Group’s announcement, the latter will only be paying RM5.28 billion. This has caused many to ask questions with regards to the missing RM2.13 billion.

Yesterday, 1MDB clarified that

The valuation contained in the announcement made by CREC to HKEx refers not to the land sale valuation, but instead to their estimated share of the net equity value of the Bandar Malaysia project, based on certain assumptions, which are subject to further negotiations during the Completion period between January and June 2016.  The starting point of any net equity value calculation, is the land sale valuation of RM12.35 billion, of which the Consortium’s 60% share equates to RM7.41 billion.

I had to read the above sentences a few times before I could laugh out loud at the response given by the corporate bond market specialist, Arul Kanda, who was just celebrating his first anniversary as the President of 1MDB.

The explanation is drafted with the sole intent badger and confuse the readers into submission by obfuscating the facts with clever language and incongruous financial gobbledygook.

As far as we have been told by both 1MDB and China Railway, IWH-CREC acquired 60% of the shares/equity of 1MDB’s subsidiary, Bandar Malaysia Sdn Bhd.

If that is the case, the only relevant number to be considered is how much did IWH-CREC pay for the shares.  CREC has announced that they paid RM5.279 billion to their regulatory authority, the Hong Kong Exchange.

The valuation of the land held by Bandar Malaysia – whether it is RM12.35 billion or RM20 billion or only RM4.2 billion, is irrelevant, because 1MDB will only be paid RM5.279 billion for the 60% stake in Bandar Malaysia Sdn Bhd.

Hence 1MDB is clearly attempting to deceive the public with a 60% “land sale valuation” where 1MDB would collect RM7.41 billion, because it is simply not a land sale transaction!

Whether intentionally or otherwise, 1MDB has made a major mistake in the attempt to boast bigger numbers for its 31 December announcement to make the Prime Minister look good.   Now, instead of admitting that it has made the mistake, 1MDB is trying to cover up for the glaring boo-boo with an utterly laughable attempt to explain away the discrepancies.

Even 1MDB’s endeavour to bridge the gap by claiming that “adjustments may be made to the RM7.41 billion land sale valuation, depending on whether or not certain Bandar Malaysia related liabilities can be passed to the Consortium” does not hold water.

This is because China Railway would have been required to disclose to the Hong Kong Exchange and their shareholders such a material contingent difference between the price paid by the joint venture – RM5.279 billion, and a possible increase to RM7.41 billion.  The HKEx is certainly not an exchange regulatory regime to be trifled with, unless China Railway wants to unnecessarily risk stringent penalties on itself.

To avoid losing further credibility, once again we call upon the 1MDB Directors to immediately agree to make public the Share Sales & Purchase Agreement between 1MDB and the IWH-CREC Consortium. This is to ensure that Malaysians can understand the exact terms of the transaction, and not the fancy spruced-up version which 1MDB wants Malaysians to believe.

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