You don't get to be Malaysia's richest man, worth anywhere from US$12 billion (according to Forbes) to over $18 billion (according to Bloomberg), by buying high and selling low.
So, when Robert Kuok makes a bid to take Singapore-listed PACC Offshore Services Holdings (POSH) private at S$0.215 per share in cash, the whole offshore business should take notice.
Now aged 96, Kuok was a schoolmate of Singapore's legendary prime minister Lee Kwan Yew in the 1920s, worked for the Japanese under the Occupation of Malaya in the 1940s, and then built his fortune through the domination of the Malaysian sugar market in the 1950s and 1960s, before diversifying with the Shangri-La chain of luxury hotels, property development across Asia, Coca-Cola bottling plants, and shipping and shipbuilding.
POSH was floated on the Singapore stock exchange in the heady days of April 2014 at a price of S$1.15 per share, raising S$388 million (US$308 million at the time), but the Kuok Group retained 75 per cent of the shares and control over the company.
Prior to the announcement of Kuok's bid to take the company private via Quetzal Capital, POSH shares were trading at just S$0.10 for most of October, so for lucky speculators, Kuok's privatisation offer has provided them with an opportunity to double their money, whilst unlucky long term investors, who bought and held their shares since the time of the initial public offering, have suffered over 80 per cent capital destruction.
A cash offer from Kuok might seem the best possible outcome, given that POSH's other Singapore offshore rivals have all ended up as almost complete wipe-outs for their long suffering shareholders: Swiber and Emas Offshore are under judicial management; Ezion and Pacific Radiance are undergoing restructurings where the best possible outcome is a huge equity write off, if they survive at all; whilst private MEO is in default on its notes. Swissco Holdings was placed under judicial management and had its assets sold, and Pacific Richfield Marine was completely liquidated. Something is better than nothing.
Ahead of the privatisation offer a few days ago, the management of POSH were at pains to paint a dire picture. When the company listed in 2014, it had valued the seven long distance towing tugs in its 50 per cent owned POSH Terasea joint venture with Ezion and Seabridge Marine at a total of $222.5 million.
As of December 31, 2018, POSH had reported that the JV held $15.6 million of cash and had net assets of $31 million, primarily now nine long distance tow tugs and salvage vessels. But by September 2019, the joint venture was out of cash and out of luck.
POSH Terasea defaulted on a $27.6 million loan, which then triggered a cross-default under a second loan facility by another financial institution. The second loan facility of $7.1 million comprised ship financing loans and a short-term facility and was secured against two anchor handling tugs. The lender moved to seize the assets, and the shareholders decided to walk away. Ezion's desperate financial situation was covered by Baird Maritime here recently.
At the end of October, just before the privatisation offer, POSH announced that POSH Terasea would be wound up and liquidated. The company announced in its third quarter results that it had written off $39.8 million from the bankruptcy of the joint venture, being its investment and a $14.4 million loan it had made to the JV (at least we know now where the cash on the JV balance sheet came from at the end of last year). This pushed POSH into a $40 million headline loss and added to the sense of doom about the company.
Charts 1 and 2 show the rising debt, falling shareholder equity, and deteriorating net asset position of POSH.
But the fact is that Kuok has played the company's minority shareholders masterfully. The Kuok Group used the proceeds to the IPO to fund POSH's newbuilding programme…at its own shipyards.
So, the public shareholders effectively subscribed $300 million to an IPO in 2014 which was used to fund four years of shipbuilding at its controlling shareholder's yards, even as every other ship owner in the offshore industry tried desperately to cancel their newbuilding orders to avoid having to pay for them.
Taking delivery of vessels ordered at the top of the market in 2013 or 2014 in the industry downturn has proved a disastrous strategy for every other owner, as vessels immediately needed to be written down from the price paid to the yard to their massively discounted actual market value, and many of the new deliveries went straight to lay up or sat idle for months bleeding costs.
As a result, yards in China and Europe faced a deluge of cancellations for late delivery, for failing to deliver in accordance with the specifications, and from clients who simply refused to pay any more than the deposit and walked away, as Transocean recently did with two deep-water rigs in Korea (see here).
Amid this shipbuilding carnage, POSH never went back to its yards to cancel an order, even as its debt rose substantially, and even as it was writing down the value of the nearly new vessels in its fleet.
All this was disclosed in the prospectus back in 2014, including the fact that the company's then CEO Gerald Seow was, "responsible for overseeing the KSL Group's shipyard activities," and that, "Mr. Seow is also a member of the board of directors of PaxOcean Engineering Zhoushan Co., Ltd and PaxOcean Engineering Zhuhai Co., Ltd, both of which are subsidiaries of KSL involved in shipyard operations."
The prospectus showed that PaxOcean yards were exactly where POSH was building its $318 million of new building commitments at the end of 2018.
How exactly was POSH to demand a better deal or ditch new buildings at PaxOcean when its own CEO was a director and its own controlling shareholder owned the shipyard? Investors in 2014 would have been well advised to ask whether using their investment to spend at the Kuok Group's own yards was actually in their interests. They didn't. The Kuok Group yards hoovered up the proceeds of the IPO.
Now the public money has fulfilled its function, Kuok is taking the company private. Chart 3 shows how the new building programme was essentially completed within the prior 12 months to the privatisation being launched, and how it consumed all the cash raised at the IPO.
This isn't to say that there haven't been impairments in POSH, like every other player in the industry over the downturn; there have been impairments, very large ones, as Chart 4 shows.
Despite writing down the value of its assets by over $600 million in the four years of the downturn, POSH just kept taking delivery of its new buildings from the Kuok Group yards. And the minority shareholders said nothing. It is hard to avoid the conclusion that they have only themselves to blame for their issues.
So, the Kuok Group is taking the company private just when the market is showing signs of recovery and just as its newbuilding programme at Kuok Group yards has come to a close.
POSH's balance sheet has deteriorated, but the company remains strong and solvent. Market rumours suggest that POSH may even buy back the Terasea joint venture vessels for cents on the dollar when they are sold by the liquidators.
It is hard to avoid the conclusion that the public listing has served its purpose. The Kuoks will take POSH private and reap 100 per cent of the benefits of the long-awaited market recovery, rather than sharing them with the Singapore public.
Sell the shares to the public above book value when offshore hype was at its craziest, then buy them back below book value when despair rules the day five years later. That's how you become the richest man in Malaysia.
Before we eulogise Kuok too much, however, we should perhaps close by mentioning that his biggest source of wealth is a stake in Wilmar International, the world's largest listed palm oil trading and plantation company with over 200,000 hectares of plantations in Indonesia and Malaysia. Palm oil production is founded on the plunder of the tropical forests and marshes, widespread habitat destruction, pesticide pollution, and the dispossession of the native people of Borneo.
If you thought oil and gas was a dirty business, you ain't seen nothing compared to the palm oil business.
Notes
You can read POSH's 2014 IPO prospectus, a relic of a happier, more prosperous times, and marvel at how nobody bothered about the myriad declared conflicts of interest and related party transactions with the Kuok Group here: https://posh.listedcompany.com/misc/1.3.01_Prospectus_PACC_Offshore_Services_Holdings_Ltd._(17_April_2014)(1).pdf
Read Malaysian press coverage of the POSH privatisation by Quetzal Capital here:
Read POSH's third quarter results here:
The 2018 annual report which is the basis for the graphs is here: