by Ganesh Sahathevan
Anwar Ibrahim wants Mokzhani Maahthir's head , but seems shy of one of Mokzhani's biggest deals, the Ayer Molek affair of the mid 1990s . The deal involved the pursuit of a bank license , various financial companies, and a slew of high profile stockbrokers and complex transactions all of which were under the purview of the then Finance Minister, Anwar Ibrahim. . The articles below give a good summary of that sordid affair , and this excerpt provides a snapshot of those involved:
Murad, now with 42% of Ayer Molek, seeks to sell the shares for M$157 million to balance Rakyat's books. He turns to broker Peter Lim of Kay Hian-James Capel, who, after two unsuccessful attempts at placement, enlists the help of Phileo Allied's Tong. One of Kuala Lumpur's hottest deal makers, Tong agrees to place the shares but splits them into one block of 30% and three small ones of 4% each. (A possible reason for the split: A sale of more than 33% to one party would require a general offer at the same hefty premium to market value at which Phileo was placing the shares.)
According to a well-informed source, the 30% block is sold to an Australian-based investor, whom the source declines to name, for M$112 million.
TOE BE READ WITH
Even entrepreneurs trip. And Tan Sri Ting Pek Khiin misstepped spectacularly in early April when he cheerfully told reporters that his company, Ekran, was negotiating to buy Wah Tat Bank, Malaysia's smallest commercial bank.
Under Malaysian law, anyone wanting to buy a bank must receive approval from Bank Negara, the central bank, even to begin talking. Ting hadn't, and red-faced Ekran officials scurried to contain the damage the next day.
Now Ting is lying low. But a new and noteworthy suitor has emerged for Wah Tat, which is based in Sibu, in the eastern state of Sarawak. The entrant is Tongkah Holdings, a listed manufacturing, medical and financial-services firm controlled by Mokhzani Mahathir, a son of Prime Minister Datuk Seri Mahathir Mohamad.
Tongkah has yet to receive approval from Bank Negara to begin negotiations with Wah Tat, but most analysts expect it to get the green light soon. According to a source close to the central bank, other would-be suitors for Wah Tat have been rebuffed with the explanation: "It's going to Tongkah."
It's no surprise that Malaysian businessmen want to own banks: They're almost a licence to print money. The typical pre-tax return on shareholders' equity for Malaysian banks ranges from 13% to 26%. A freeze on new banking licences has been in place since the early 1980s, so competition isn't likely to cut into margins. Indeed, the central bank thinks the country has too many banks and would like to see some merge.
Wah Tat, however, is an anomaly. It's a small bank with shareholders' equity of only M$65 million ($27 million) and pre-tax profits of M$8 million in 1994. And capital constraints have crimped its growth; it has 13 branches, a very small number for a local bank.
For those reasons, the bank has been an object of attention for some time. But the Chew family, which controls the bank, has been holding out for a price of M$500 million. Sources close to Tongkah say M$250 million would be fairer, but concede that the final price might be between the two figures.
The attraction of Wah Tat, apart from its availability, is that it hasn't listed on the stockmarket but will qualify to do so next year. Vigorous management, coupled with connections in the right places, can add a lot of value to a bank seeking a listing. (The Chews have neither the connections nor the capital.)
In 1993, for example, Hong Leong chieftain Tan Sri Quek Leng Chan bought what was then MUI Bank for more than M$700 million. He not only doubled its profits within a year, partly through business from his giant group, but received central-bank approval for 25 new branches. The result: When it listed in October 1994, Hong Leong Bank was worth M$3.3 billion.
Mokhzani apparently hopes to do something similar with Wah Tat. In 1992 he began buying shares in Tongkah and today owns a controlling 18%. The company had posted losses for eight straight years before he helped turn it around in 1993. It made profits of M$12 million for the year to June 1994.
Now Tongkah has begun to diversify, with some help from the government. In 1993, the firm was awarded a portion of the national medical services, which have been privatized. Although financial details are still being ironed out, Tongkah expects at least M$79 million in medical revenues.
Mokhzani has moved into manufacturing as well, snapping up 75% of appliance-maker Sharp-Roxy in 1993. And in October last year, Tongkah acquired 75% of stockbroker MBf Securities. All payments, however, have mostly been in the form of new shares and debt instruments. Tongkah's equity has swollen to M$117 million from M$39 million, and will jump further when a share issue intended to pay for the brokerage is approved.
Whether Mokhzani will need partners to help him finance the Wah Tat purchase is unclear. But if he does, two people in particular will be eager to help: Tan Sri Vincent Tan, controlling shareholder of the sprawling Berjaya Group, and Datuk Thong Kok Khee, who owns two listed companies and is group executive director of Berjaya.
Thong tried to buy Wah Tat last year, and thought he had it sewn up, according to sources close to the deal. This belief was based on his relationship with the central bank, from which he bought 30% of Ayer Molek, a listed company whose stock landed in the bank's hands when the authorities rescued Rakyat Merchant Bankers from insolvency. Thong, through his listed company, Insas, offered M$156.6 million for the Ayer Molek stake, which a grateful central bank accepted. Ayer Molek's total paid-up capital is only 1.8 million shares.
But if Thong thought he had earned enough goodwill to be allowed to purchase Wah Tat, he was disappointed. When he asked for permission to buy the bank in October, the authorities turned him down. The reason, according to a central-bank source, was his links with Tan, whose Berjaya Group also owns a gaming firm. Bank Negara frowns on banks having ties to gaming firms.
That put Thong in a spot. Insas had already made a 10% downpayment on the Ayer Molek deal and he had thought Wah Tat would be part of the package. According to sources close to Insas, Thong and Tan turned to someone they thought capable of securing central-bank approval -- Mokhzani.
Tongkah put in its bid in November, but the central bank sat on it. Sources close to Tongkah say the bank was reluctant to move lest Mokhzani's application be used as an issue in the just-concluded general election.
Meanwhile, the Ayer Molek deal is in limbo, with Insas requesting an extension of the deal period. Still, neither Thong nor Tan is willing to leave anything to chance. According to a source close to Thong, a Berjaya unit has bought almost 6% of Tongkah and is continuing to accumulate its stock quietly.
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Ayer Molek is a small Malaysian rubber company that owns some plantation land. Its other assets are a listing on the Kuala Lumpur stockmarket and the fact that it has a mere 1.8 million shares in issue. Many Malaysian investors love small, illiquid stocks; they present possibilities for lucrative asset shuffles that boringly big companies can't match.
Even by these standards, however, Ayer Molek has recently generated more than its fair share of excitement.
An acrimonious tug-of-war over Ayer Molek shares has challenged the integrity of Malaysia's justice system, threatened the solvency of a financial-services company, spawned numerous lawsuits and at least two police investigations, and embarrassed the country's central bank.
And yet all this ulcer-inducing unhappiness is now supposed to disappear as a result of an agreement between the two companies on opposite ends of the Ayer Molek share transaction. Under a deal hatched on September 8, financial-services firm Insas (the buyer) and banking and broking group Phileo Allied (the seller) agreed to cancel the share sale at the centre of events. By doing so, they will help rescue a troubled state-owned merchant bank, remove the source of an unseemly public row that has split judges and lawyers, and avert a possible chain of financial defaults.
Bravo? Not quite. The closed-door peace settlement between warring parties showed Malaysian corporate ingenuity at its best -- and worst. The accord and the events preceding it raise numerous questions about the sanctity of contracts and transparency of business dealings in Malaysia at a time when Kuala Lumpur is trying to become a financial centre to rival Hong Kong and Singapore.
"The important thing is that no one will lose," says Tong Kooi Ong, chief executive of Phileo Allied.
A bemused lawyer is less sure. "The judicial crisis was sparked by allegations that litigants in commercial disputes could choose their judges. Now it looks like everything will be forgotten."
The Ayer Molek saga has been far from simple. While many aspects of the affair remain unexplained, the following picture emerges from court and other documents and interviews with many of those principally involved:
In April 1994 state-owned Rakyat Merchant Bankers, now renamed BSN Merchant Bank, goes bankrupt. Four of its senior executives are subsequently charged with lending M$330 million ($132 million) to 110 bogus companies and individuals for the purposes of buying shares in listed companies.
Bank Negara, Malaysia's central bank, institutes a rescue, led by senior adviser Datuk Abdul Murad Khalid. He discovers the scam involved purchases of controlling stakes in three small companies, one of which is Ayer Molek. It appears M$157 million has been paid from Rakyat's accounts for 51% of the rubber company.
Seeking to recover this sum, Murad gains possession of 30% of the shares and traces others to Choo Keng Weng, a middleman. Some negotiation is required to obtain their return. On September 23, 1994, Choo agrees to hand over a 12% Ayer Molek stake to the central bank free of charge; in return, Bank Negara allows him to keep 5.7% of Ayer Molek and promises to withdraw "all complaints, allegations and court actions" against Choo. (Another 3% of Ayer Molek is unaccounted for.)
Murad, now with 42% of Ayer Molek, seeks to sell the shares for M$157 million to balance Rakyat's books. He turns to broker Peter Lim of Kay Hian-James Capel, who, after two unsuccessful attempts at placement, enlists the help of Phileo Allied's Tong. One of Kuala Lumpur's hottest deal makers, Tong agrees to place the shares but splits them into one block of 30% and three small ones of 4% each. (A possible reason for the split: A sale of more than 33% to one party would require a general offer at the same hefty premium to market value at which Phileo was placing the shares.)
According to a well-informed source, the 30% block is sold to an Australian-based investor, whom the source declines to name, for M$112 million.
The three small blocks, meanwhile, are sold to three companies domiciled in the British Virgin Islands. However, the combined 12% is registered under the name of PFA Nominees, a local nominee company.
Subsequently, Insas enters the picture, and agrees to buy the 30% block -- but this time the price is M$157 million, the total sum Bank Negara was seeking. The deal is sealed on September 27, 1994, when M&A Securities, an Insas stockbroking subsidiary, contracts with Phileo to buy the block -- 20% for Insas and 10% for Megapolitan Nominees, a company believed to be linked to Insas boss Datuk Thong Kok Khee. M&A pays Phileo a 10% downpayment of M$15.7 million on October 5. Insas guarantees that the rest will be paid by March 28, 1995.
At this stage, Insas is apparently unaware that another 12% of Ayer Molek had been available, or that M$157 million was the figure Bank Negara would have accepted for all 42%. (On the face of it, the Australian-based investor has made a M$45 million profit on his temporary ownership of the 30% block.)
Subsequently, Insas has second thoughts about Ayer Molek. Phileo and Bank Negara try to help Insas extricate itself from the sale. Letters shown to the REVIEW say that on February 27 this year, a meeting was held at Bank Negara's offices, attended by central-bank adviser Murad, Phileo's Tong, Insas officials and representatives of Kuala Lumpur Industries, another listed company. Ostensibly, the aim is to arrange for KLI to buy the 30% block of Ayer Molek, but for unexplained reasons, the deal fizzles.
On March 24, Insas's Thong asks Phileo to extend the payment period by six months, to September 30. In a letter, Thong says Insas "would not be in the position" to pay as it is in the process of a rights issue "the proceeds of which are expected to come in around September."
To press his request, Thong enlists the aid of Tan Sri Vincent Tan, one of Malaysia's most influential businessmen. Tan heads the Berjaya Group, of which Thong is a group executive director. On March 24 the two men meet Murad, the Bank Negara adviser, to seek "assurances" that Thong's request to Phileo for a payment extension will be met. (Interviews and court documents make it clear that Tan subsequently played a prominent role as middleman in the Ayer Molek saga.)
On March 28, Phileo agrees to an extension on condition that Insas pays a further 10%. Insas does so through a M$15.7 million credit facility from Phileo Allied Bank.
From here on, things started to sour for Insas. At the time it agreed to buy Ayer Molek's shares, they were trading at M$160 each. Yet it had agreed to pay M$290 a share. Why? Sources close to the deal say Thong expected a grateful Bank Negara to let him buy Wah Tat Bank, a small commercial bank in Sarawak, eastern Malaysia. But when Thong sought permission, it was refused. A banking source says the problem was Thong's close link to Berjaya's Tan. Berjaya's many interests include a gaming firm -- and Bank Negara frowns on banks having ties to such companies.
Insas also got wind of another problem. Ayer Molek's directors had for six months refused to register the 12% stake held by PFA Nominees. Their challenge to PFA on the true identity of the shares' owners was to spawn the first of the lawsuits and complaints to the police.
Fearing its own shares would be rejected for related reasons, Insas sought a High Court injunction instructing Ayer Molek's directors to register its shares. The injunction was granted, only to be overturned by the Court of Appeal. Subsequently the Federal Court, headed by Chief Justice Tan Sri Eusoff Chin, Malaysia's top judge, stayed the appeal judges' decision. In comments that rocked the judiciary, Eusoff strongly criticized the appeal court's conduct of the case. The Bar Council, representing Malaysia's 5,500 lawyers, then claimed the Federal Court had been improperly constituted, rendering its verdict void. On September 7, Prime Minister Datuk Seri Mahathir Mohamad publicly told judges and lawyers to stop squabbling.
By this time, things were looking desperate for Insas. Ayer Molek's share price continued to fall as Insas's September 30 payment deadline loomed. It is now M$95, meaning that Insas's M$157 million stake is worth only M$51 million.
Worse, Insas had become embroiled in the police investigation of the 12% block of shares held by PFA Nominees. On July 14, the police commercial crime division asked Insas and Megapolitan to surrender their 30% block, which they did. Megapolitan's 10% was returned on July 18; as of August 30, the police still had possession of Insas's 20%.
On August 30, however, events took a dramatic turn. Wong Chan Kui, an Insas executive director, filed a 66-page complaint to the police, claiming Insas had been misled as to what it was getting when it agreed to buy the Ayer Molek shares. The complaint named Murad, the Bank Negara adviser; Phileo Allied's Tong; and Rakyat Merchant Bank.
The report's contents haven't been made public, and what -- if any -- bearing it had on events to follow isn't clear. Tong says he had "heard rumours about the report, but no one has come to talk to me about it." Murad says he has "not seen the report, so I am in no position to comment on its contents."
Nonetheless, people familiar with the resolution of the Ayer Molek dispute wonder if such a speedy settlement would have been reached if a police report hadn't been filed. These sources say Phileo and the central bank were under "tremendous pressure" to resolve the affair before September 30, the deadline for Insas's payment.
The settlement was vintage Malaysiana. Phileo terminated the contract with Insas and agreed to return its M$15.7 million deposit -- with interest (M$1.25 million). It also assumed all Insas's remaining liabilities in the share transaction.
Next, according to an executive familiar with the deal, Bank Negara gave its blessing to an unravelling of the share transfer "step by step, back to square one." Thus Phileo will return all Ayer Molek shares to Rakyat. The returned stake will amount to 42% of the rubber company, or 756,000 shares. (How Phileo will obtain the 12% held by PFA Nominees is not explained; nor is it clear whether any payment to PFA is involved.)
Finally, the 756,000 shares will be bought from Rakyat by Datuk Mohamed Hilmi Ismail and Ismail Ahmad, respectively Ayer Molek's chairman and chief executive. They will pay M$158.68 million (M$157 million plus interest) for the block, or M$209 a share. Rakyat will pay Phileo the monies it lost to Insas.
The deal's defenders argue that the settlement solves some severe headaches. First, Rakyat gets the M$157 million it needs to plug the hole in its accounts. Second, Insas avoids a financial crisis. The defenders say that if Phileo had pressed its claim, Insas would have suffered major losses at best and bankruptcy at worst-leading to the possible suspension of its stockbroking arm and defaults among the broking community. Indeed, if Insas had defaulted, Phileo's stockbroking arm, as the intermediary, would have been liable for the payment due to Rakyat Merchant Bankers.
Third, the settlement includes a withdrawal of all lawsuits connected with Ayer Molek -- meaning, as one lawyer puts it, that the impasse created by the Bar Council's criticism of the Federal Court will simply "vanish."
And the Ayer Molek directors? What do they get out of the deal in return for buying their company's shares at more than double their current price? They get to stay in control -- and some analysts suspect that an injection of new assets into Ayer Molek may be in the works. That could be just what's required to send the rubber company's shares soaring to many times their present value. Assuming, that is, that the complex peace deal doesn't start to crumble.
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