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Wednesday, February 03, 2016

Shell: Déjà vu all over again!



Yogi Berra is a successful American baseball player who had an amazing ability to say the funniest one-liners. In Malaysia, we also have a whole bunch of yogis who have achieved various degree of success; some are even holding high position in our Government. I'm digressing...

Today, we have a comment from Datuk Moehamad Izat Emir, the President of The Malay Businessmen and Industrialist Association of Malaysia (Perdasama), saying that Perdasama is aware of a local buyer who offered to buy the stake in ShellM at between RM4.00 & RM4.20 per share. He even asked the rhetorical question: Why Shell chose to sell at this (low) price to a foreign company and incur massive losses? This was reported by The Edge Financial Daily.

I have never heard of Perdasama nor its President, Datuk Moehamad before this. If you have shares of ShellM, your natural tendency on reading this 'news' would be to see whether this mysterious buyer would quickly surface. 

However, we must be careful not be swayed by pure conjecture dressed up as a 'news' item. If there is a serious buyer at the stated price of RM4.00-4.20 per share, Royal Dutch Shell group would certainly accept the offer. Since the deal is done at RM1.80 per share, it is very likely that there is no such offer. 

In addition, Datuk Moehamad's rhetorical question seems to suggest something devious; that the transacted price of RM1.80 per share is less than the agreed purchase consideration. What he may be hinting at is that part of the purchase consideration is settled between the parties separately. Such a contract would be the opposite of the 'norm' in Malaysia contracting scene where the true transacted price is less than the announced price; with the difference paid into the personal accounts of the executives signing for one side or both sides of the deal. The effect of this 'cunning maneuver' by Royal Dutch Shell group would be to cause the minority shareholders to suffer substantial loss. I don't believe Royal Dutch Shell group would deceive its local partners, especially a sophisticated investor like EPF.

This deal reminded me of  San Miguel's acquisition of Esso Malaysia in 2011. At that time, there were reports that Exxon, the holding company of Esso Malaysia, should have waited for a better price to sell its 65%-stake in Esso Malaysia. LTAT was even reported to have made a higher offer which was not accepted. (Why?) For more, go here.  

Any shareholders of Esso Malaysia who held out for a better price would have regretted their decision until recently. Thanks to favorable crack spread, Esso Malaysia (now, PetronM) has enjoyed bumper profits for the past 3 quarters which have pushed up its share price substantially. Whether the same favorable outcome would happen in the future for ShellM would depend on many things, including how the mandatory GO for ShellM's minority shares would eventually be resolved. 

There are 2 scenarios:
1) The buyer, Malaysian Hengyuan International Ltd ('MHL") may privatize ShellM in order to restructure the entire operation
2) MHL may keep the listing of ShellM because the business of refinery is capital-intensive and, as the record shows, only marginally profitable.

If MHL opts to privatize, your losses would take effect immediately. If MHL chooses to keep the listing, your stock may have a chance to rebound back. You must ask yourself this question: Is there a reason to take the risk of holding onto ShellM as compared to selling off at the current price of RM3.70 today? Investors must be realistic and make decision based on fact, not pure conjecture!!

Note:
In addition to the disclaimer in the preamble to my blog, I hereby confirm that I do not have any relevant interest in, or any interest inthe acquisition or disposal of, Shell and PetronM.

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