Why has Sime Darby changed tack on E&O investment?

WHEN Malaysian conglomerate giant Sime Darby Bhd picked up a 30 per cent stake in niche builder Eastern & Oriental Bhd (E&O) five years ago at an eye-popping premium and dodged a general offer (GO), the world's largest oil palm planter unwittingly set off a chain of events unheard of at the time in corporate Malaysia.

Minority shareholders were incensed that they were not entitled to the sweet RM2.30-a-share exit option - a 60 per cent premium over E&O's price level then - that state-controlled Sime Darby paid to acquire the block. The buyer paid a total of RM776 million (S$259 million) to three parties, including Singapore's GK Goh Holdings and E&O managing director Terry Tham.

In a rare display of protest against a regulator there, a minority shareholder of E&O took Malaysia's Securities Commission to court for granting Sime Darby a GO waiver. The spotlight was also turned on the watchdog's chief then whose husband was chair of E&O's board.

After all that unpleasantness, Sime Darby now appears to have had a change of heart.

The investment that was originally intended to mix things up by getting into the upscale residential space in Johor and Penang where much smaller and more nimble E&O has a solid presence, has been supplanted instead by a wider plan to rationalise its property investments to make way for other opportunities.

Last Friday, Sime Darby said it was selling 10 per cent of E&O plus all convertible warrants to Mr Tham for RM342 million cash or RM2.60 apiece (which a research house described as a "staggering premium" over its last closing price of RM1.59). This follows an earlier 9.9 per cent stake sale in E&O by Sime Darby two years ago, also to Mr Tham. As a result of the latest acquisition, Mr Tham will depose Sime Darby as its biggest owner with a 21 per cent interest, followed by the RM50-billion market cap conglomerate with a 12.2 per cent stake. Sime will retain its board seat in E&O.

Essentially, Mr Tham, the man who has helmed the firm for over two decades and credited for shaping E&O into a high-end real estate player, is buying back all the shares (and more) which he had sold to Sime Darby in 2011.

Market watchers say this could be a prelude to bigger plans which Mr Tham, who will be redesignated as executive deputy chairman, may have in store for E&O. Why else would a 62-year old who admittedly was "working towards retirement" fork out a cool RM660 milllion to raise his stake in the firm?

As for Sime Darby, it has unloaded over half of its stake and chalked up a disposal gain of RM109 million from these two transactions. Yet, it should be noted that what had started out backed by strategic clarity on Sime Darby's part - it had even provided a point-by-point explanation to 24 FAQs on the deal - has now whittled down, alongside Sime Darby's stake in E&O, into strategic ambiguity.

Some say that politics could have been one factor as E&O is a property developer based in Penang, a state led by the opposition party while Sime Darby is a government-linked company (GLC).

Others say Sime Darby and E&O were not good fits from the start, and the gradual unwinding of the GLC's investment in the niche developer is proof of that. "Property business in Malaysia is very localised and success is often driven by the entrepreneur, location, the concept... Big corporations with mass market experience don't do well with niche players like E&O. That's the lesson here," said a top property executive.

There are bigger worries. Sime Darby has embarked on an asset monetisation plan which also includes asset disposals in Singapore and Australia to ease its gearing levels at a time when slowing global growth, lower commodity prices and a weaker ringgit have hurt operations. Moody's Investors Service warned in March that Sime's financial profile has deteriorated in large part since the "heavily-debt funded" acquisition of New Britain Palm Oil for RM6 billion last year.

Under great strain to deleverage, Sime Darby's change of tack on its E&O investment, more so since it hadn't lost money, can be easily appreciated. But it's small beer in the bigger scheme of things.