Amanda Lacaze, the chief executive of rare earths group Lynas Corp, would have had a lot on her plate as she sank into her seat at the pointy end of Malaysian Airlines flight MH122 from Sydney to Kuala Lumpur on Sunday, March 31.
It's been a crazy week for Lynas and Wesfarmers.CREDIT:
It had been a crazy week. Plans to take her elderly mother to hospital procedure for a bone biopsy that Tuesday morning had been upended by a surprise $1.5 billion conditional takeover offer from Perth-based conglomerate Wesfarmers.
It was the latest chapter in a book of failed negotiations, dating back eight months, revolving around Lynas’ big problem in Malaysia: the new government ruled by the oldest world leader, 93-year-old Mahathir Mohamad, was not enamoured of Lynas’ controversial operations in the country.
Lynas chief executive Amanda Lacaze. CREDIT:PETER BRAIG
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Malaysia craves the new-economy aura that relies on the rare earths processed by Lynas - electric cars, smart phones and wind turbines - but is less keen on the perceived environmental cost.
The controversial $1 billion Lynas rare earths processing operations in the country had already produced hundreds of thousands of tonnes of waste with low-level radioactive residue, and it was a growing concern to some members of the Mahathir government and a vocal band of locals.
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Last December, this resulted in a condition being put on Lynas' licence requiring it to export all 450,000 tonnes of existing radioactive waste, creating an existential crisis for the company Lacaze had spent years dragging out of a financial, and operational, black hole.
Opposing views expressed by his cabinet ministers on Lynas last week highlighted the delicate balancing act the veteran politician has had to manage on this very public issue.
No wonder then that the licensing issue was one of the conditions of the “indicative and highly conditional proposal” that Lynas rejected the day after Wesfarmers made it public.
Lacaze must have known that would not be the end of the matter.
A rare earths processor such as Lynas was the perfect target for Wesfarmers boss Rob Scott. He needed the right acquisition to signal the new direction he was taking the $39 billion industrial group after spinning off its supermarket operation, Coles.
Wesfarmers chief executive Rob Scott needed the right acquisition to signal the new direction he was taking the conglomerate.CREDIT:TREVOR COLLENS
So it was not just a bizarre coincidence that a team of Wesfarmers executives were walking past her seat ahead of the flight to Kuala Lumpur that autumn afternoon.
No doubt, the surprised group kept their newspapers high and voices low for the nine-hour flight, given Lacaze's hostile response to Wesfarmers in the wake of its bid.
“For a long period of time I worked at Telstra; I understand the arrogance of large companies,” was one of her verbal barbs at the unwelcome suitor.
“We had assurances from Wesfarmers that it was not in their DNA to do unfriendly and hostile takeovers, yet they took the action they did.”
She would have been doubly unimpressed that this team was joining another Wesfarmers group flying in from Perth to talk with Malaysian government officials about its interest in Lynas and the regulatory jungle engulfing the group. The visit was meant to be discreet and low key. That was the plan anyway.
According to Scott, it was entirely logical for Wesfarmers to visit Malaysia and see first hand the problems relating to the biggest condition on its indicative offer - the uncertainty of Lynas being able to operate beyond September, when its licence is up for renewal.
It is why Lynas and Wesfarmers started talks in August last year on a joint venture to process the rare earths ore it mines in Western Australia within the state and avoid the regulatory problems associated with processing in Malaysia. But Lynas called off those talks in November when Wesfarmers started looking at its would-be partner as a takeover target instead.
Lynas's reluctance to consider a bid at $2.25-a-share is understandable. While the offer was pitched at a 45 per cent premium to its share price the day before, the stock had been trading around $2.90 before the shock Malaysian election result last May reinstalled Mahathir as Prime Minister and triggered its regulatory woes.
But Scott insists Wesfarmers has been very open with Lynas about its intentions, including its plans to visit Malaysia.
"When we made the takeover public, we said to them that we intended to meet with the Malaysian government to, first of all, establish our credentials," Scott told The Sydney Morning Herald and The Age.
"The reason for doing that was two-fold. Any potential transaction by a foreign company would ultimately require the Malay government to endorse the licence.
"Second, it was a strategically important asset in Malaysia and for us to announce a potential transaction without giving the courtesy of speaking to the government would have been considered quite poor form."
Issue comes to a head
But to its critics, Wesfarmers' grand strategy had “face-planted” before the team had stepped off the plane because they had no right to be there in the first place.
One thing both sides would probably agree on is that Wesfarmers could not have picked a worse week to quietly go about the business of probing the Malaysian government on the Lynas issue.
The spat between two ministers last week, about the onerous new conditions put on the Lynas licence last December, forced Mahathir to bring the issue to a head at a cabinet meeting last Friday.
"There may be differences in opinion, but what is determined by the cabinet is what is official,” he told reporters on Wednesday.
By that time, the Wesfarmers delegation were knee-deep in meetings.
They had been meeting officials and ministers from two of the ministries relevant to the future of Lynas in Malaysia - the Ministry of International Trade and Industry (MITI) and the Ministry of Energy, Science, Technology and the Environment.
Their presence had caught Mahathir's attention, which should not have been an unexpected development for the company.
Mahathir had led Malaysia's strong campaign for foreign investment. Wesfarmers is a $39 billion conglomerate with a mandate to invest around $10 billion after the Coles spin-off.
It was an opportunity the PM was never going to ignore, but the relatively low-level delegation clearly needed more firepower for such a high-level meeting. Scott dropped everything and flew to Kuala Lumpur on Thursday to meet with Mahathir, before turning around and flying out that evening.
Only the parties involved know exactly what was discussed in the meeting, but you can imagine the shock when Mahathir stepped out of the cabinet meeting on Friday evening and dropped a bomb with his grand new plan to reconcile the disparate interests of his coalition partners.
“We have opened up the business to other people, and there are other companies willing to acquire Lynas,” he said. “They have given us a promise that in the future, before sending the raw materials to Malaysia, they will clean it up first. They will crack it and decontaminate it in some way with regard to radioactivity.”
His comments were widely interpreted as suggesting Wesfarmers had cut a deal with the Malaysian PM over a company it did not own a single share of.
Wesfarmers has been on the back foot, defending its corporate reputation, ever since.
"We question the governance of companies that make undertakings to foreign governments about assets that they don't own,” says Matthew Ryland, a portfolio manager with one of Lynas’ biggest shareholders, Greencape Capital.
At the bottomline, this looks for me like a chapter of innocents abroad.
Ownership Matters' Dean Paatsch
Dean Paatsch, the influential head of corporate governance advice group Ownership Matters, says: "I think it is unethical. It may be legal but it’s not the way to do business."
No one is accusing Wesfarmers of anything illegal, but it's almost as bad. Wesfarmers, which is still licking the wounds from its disastrous attempt to expand its Bunnings Hardware chain into the UK- its only other international venture - has been accused of dreadful naivety and poor judgement.
“There is certainly hubris, there is misjudgment, there’s, I believe, unethical behaviour. But at the bottomline, this looks for me like a chapter of innocents abroad,” Paatsch says.
He sees the major issue as the fact that Wesfarmers did not even have a formal bid on the table, it merely had a highly conditional indicative offer.
“They can walk away tomorrow and be no better or worse off, that to me should give you pause for thought,” he says.
And Malaysians with a close-up view of the issue say Wesfarmers' interference has certainly had an impact.
Lee Tan, a former Australian Conservation Foundation activist who campaigned against the Lynas presence in her country, was in Malaysia during the pivotal week ahead of Mahathir's announcement. She says Wesfarmers' presence impacted on Lacaze's bargaining position with the government.
“She probably wouldn't have got away with the waste problem, but would have had a lot more negotiating power," says Lee, who is currently a research candidate at RMIT. "Right now, she has nothing.”
Scott, unsurprisingly, has a benign interpretation of Mahathir's comments.
"As is evident publicly, for many months there has been a very adversarial relationship between Lynas and the government. And the government was very, very frustrated. The community was putting pressure on government to take action and I think the PM’s comments reflected that," he says.
As for what was discussed, Scott says: "We were careful not to make any representations on behalf of Lynas but did explain to the government why we were interested in it ... because we like the sector and we want to keep investing in the business in Malaysia. And we made it clear we were attracted to maintaining the Malaysian operations. In our initial proposal that went public, we made a very strong statement to that effect. That seems to have been lost."
The good news is that Mahathir's comments opened up the tantalising possibility that the Lynas operation, whoever owned it, would be able to continue operating in Malaysia if it cleaned the raw material of any radioactive elements before shipping it to Malaysia.
The problem is, one week after his statement, even government officials could not say for sure what this meant for the conditions governing the renewal of Lynas’ licence, and if it did anything other than add yet another onerous condition to its survival.
Whatever the outcome of the government’s deliberations, and Wesfarmers’ interest in the company, the long-term damage for the latter could be significant.
In its first flirtation with an investment with significant overseas exposure since blowing more than $1 billion on the ill-fated Bunnings UK venture, its actions in recent weeks hardly instil confidence.
“It will give investors pause for thought if they’re taking on more sovereign risk,” Paatsch says, “when the observation is their first step off the plane in Malaysia has been a face-plant.”
And Wesfarmers may face other challenges if its bid for Lynas is ultimately successful - depending on what conclusions the Malaysian government has drawn from its interaction with the group.
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Colin Kruger
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Colin Kruger is a business reporter. He joined the Sydney Morning Herald in 1999 as its technology editor. Other roles have included the Herald's deputy business editor and online business editor.
Elizabeth Knight
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Elizabeth Knight comments on companies, markets and the economy.
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