Thursday, January 07, 2016

The discrepancy between 1MDB’s “further clarification” and China Railway’s Hong Kong Exchange’s announcement becomes even more bizarre

Let me state upfront that we welcome the more detailed “further clarification” issued by 1MDB yesterday with regards to the discrepancy over the purchase price for the 60% of equity of Bandar Malaysia Sdn Bhd to the Iskandar Waterfront Holdings and China Railway (IWH-CREC) joint venture.

1MDB had earlier made the announcement that the state-owned investment firm will receive RM7.41 billion for the sale, while China Railway announced to the Hong Kong Exchange that the RM5.279 billion was the transacted price.

However, the more detailed “further clarification” yesterday effectively contradicted both 1MDB’s original statement issued on the 31 December 2015 and China Railways stock exchange announcement on 3 Jan 2016.

1MDB’s original announcement had stated clearly that 1MDB “executed a Share Sale and Purchase Agreement to sell 60% of the equity in Bandar Malaysia Sdn Bhd (BMSB)”.

The China Railway announcement also similarly stated that it “received a formal letter of award from the tender agent… notifying that the Joint Venture has obtained the right to purchase 60% of the equity interest in Bandar Malaysia Sdn Bhd”. China Railway added that “on 31 December 2015, the Joint Venture entered into the Share Sale Agreement… pursuant to which the Joint Venture will purchase 60% of the equity interest in BMSB”.

However, the latest “further clarification” refuted both earlier announcements by explaining that IWH-CREC is not buying the stake in BMSB. Instead, the joint venture will be buying 60% of a newly created special purpose vehicle (SPV). This SPV will then separately acquire the various parcels of Bandar Malaysia land from Bandar Malaysia Sdn Bhd and TRX City Sdn Bhd which are purportedly valued at RM12.35 billion.

While it may appear to the layman that we are splitting hairs, the subtle yet clear difference in the Share Sale and Purchase agreement holds wide implications, and require even further clarifications.

The first question on everyone’s minds would be, why did China Railway announce to the Hong Kong Exchange that it acquired 60% of BMSB when it only acquired a newly created SPV? It certainly boggles the mind for company like CREC to make such simple errors to the exchange regulators.

More importantly for 1MDB, the newly disclosed SPV structure to the share sale exercise also increases the uncertainty over the likely completion of the entire transaction. If 60% of BMSB has been sold, then the Bandar Malaysia land has been effectively taken over by the joint venture. However, if only 60% of a newly created SPV has been sold, then the SPV has yet to take over the Bandar Malaysia land parcels, which is still subject to further negotiations.

The entire Bandar Malaysia sale to the IWH-CREC joint venture is becoming increasingly confusing to both the financial community and the man-on-the-street.

As previously mentioned, to avoid losing further credibility, we call upon the 1MDB Directors should 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 versions which 1MDB wants Malaysians to believe.

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