The Star Backed Company With Questionable Past For Silterra

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Someone bumped into a Tan Sri CEO of a renown Public Listed Company. He was fuming with Khazanah Nasional. Apparently, Khazanah invited them to submit a proposal to merge with an entity, they repeatedy failed to turnaround. 
He was at the top of his voice ignoring passer-by over-hearing him. 
"They asked me to submit proposal. When netizen and public whack me on social media, they kept quiet. Now I look bad. I could have just focused on my investments abroad!" 
That is not an isolated case of unethical practise by former EPF CEO and now new CEO of Khazanah, Dato Shahril Ridza Ridzuan. Someone with an orang putih temperament should have strictly adhered to ethics and not be blinded by money alone. 
The Silterra deal turned out to be another case of Khazanah inviting proposals, but subsequently chugged aside ethics when foreigners came in after the deadline and brought other proposals. It is fair to suspect the earlier submitted proposals leaked, including financial offer known to the competitor. 
The son of a great man in Malaysia's early history lamented, "There is no more nation builder, bro." 
True enough, a government entity like Khazanah is pursuing money and putting aside nation building like unscrupulous investment banker like Gordon Gekko in the movie Wall Street. No wonder they invite a company investigated by MACC to submit a proposal?

Race heats up
Silterra is one of the few front-end player in the local Malaysian semiconductor industry and it is indeed an important ingredient for nation building in the said industry.  
There are only two locals invited, wonder why, namely; Dagang Nexchange Berhad (Dnex) and Green Packet before Taiwan's Foxcomm and Germany's X-Tab were invited after the deadline. 
Naturally, media were giving coverage to the bidders and a local Chinese paper, believed to be Sin Chew Jit Poh were backing Foxcomm. The Star, NST and Berita Harian backed for local as it serves to sustain the local electronic industry. [Read in our September 18th posting here]. 
Few days ago, The Star seemed to back Green Packet with their glowing appraisal of the new bid submitted:
Sources familiar with the ongoing developments said the tech firm Green Packet put in two offers last month, an updated binding offer of US$62.5mil assuming the equity conditions were retained and US$81.2mil in an alternative binding offer, if the equity conditions were removed
Race for Silterra heats up
TECHNOLOGY
Wednesday, 04 Nov 2020

By ROYCE TAN

PETALING JAYA: A new bid by Green Packet Bhd has turned up the heat on the ongoing tussle for Silterra Sdn Bhd, Khazanah Nasional Bhd’s loss-making chip manufacturer.

Sources familiar with the ongoing developments said the tech firm put in two offers last month, an updated binding offer of US$62.5mil assuming the equity conditions were retained and US$81.2mil in an alternative binding offer, if the equity conditions were removed.

How this came about was after Khazanah allegedly shifted the goalpost by opening up the bids to foreign investors, which saw two firms coming in with big bucks to compensate for their failure to meet the local equity criteria, turning the Silterra sale into a whole new ball game.

Taiwanese semiconductor giant Foxconn was said to have ascribed a US$125mil enterprise value for Silterra, of which it would pay US$87.5mil for a 70% stake.

German-based group of semiconductor foundries X-Fab put in a less attractive offer of US$70mil, but was still better than the initial offers by Green Packet and Dagang Nexchange Bhd (DNeX) at US$56.8mil and US$32.7mil respectively.




The equity conditions set by the International Trade and Industry Ministry (Miti) and the Malaysian Investment Development Authority (Mida) required Silterra’s manufacturing plant to be majority local-owned, while foreign participation can only be in minority stakes.

It was clearly spelt out that Siltera had to maintain its equity structure of 55% local, out of which 30% has to be of bumiputra status while the foreign shareholding is up to a maximum of the remaining 45%.

It is learnt that Green Packet and DNeX were told to update their bids after Khazanah extended the tender from its earlier deadline of July 31 to Oct 9 and they were told to assume that the equity condition was removed and Khazanah could retain up to 30%.

Sources said in Green Packet’s latest bid, if the equity conditions were retained, its offer of US$62.5mil includes US$5.7mil for 10% free shares to a Malaysia Inc special-purpose vehicle (SPV) as a as strategic minority shareholder to safeguard national interest in the electrical and electronics (E&E) sector.

“The government can decide if it wants to give the 10% to Mida, Khazanah or the Science, Technology and Innovation Ministry (Mosti).

“This is to allow the government to continue exercising its influence to ensure continuous support towards the local semiconductor and E&E sectors,” sources said, adding that this arrangement would lead to an effective local ownership of 59.5% with an effective bumiputra ownership of 37.2%.

In Green Packet’s alternative binding offer of US$81.2mil, assuming the foreign ownership control is lifted, sources said the group has proposed that Khazanah retain a 20% stake in Silterra.

Over time, Green Packet’s foreign partner Orient Excellent, which expressed its commitment to fully fund Silterra’s future capital expenditure requirements, will result in a foreign-majority shareholder roster. [More news on the tie-up in Edge Online here]

Out of the 80%, Green Packet will eventually hold 43.8% while Orient Excellent – a private equity fund which has China’s Finance Ministry and National Social Security Fund as among its shareholders – will hold the other 56.2%.

















The effective local ownership here is expected to be 55%, with an effective bumiputra stake of 39.3%
It is said that the investment by Green Packet will be made through the RM500mil BumiTech Fund, a private equity fund which aims to support the growth of late-stage high technology companies owned by bumiputra entrepreneurs to upscale, expand local and global networks and eventually export technology products and services.

Sources also said what Green Packet had in store for Silterra would be the access to a large network of semiconductor companies such as its collaboration partner Huaqiang Group, which owns the largest distributor of semiconductor components in China, and Konka, a leading electronic conglomerate, also in China

Silterra will also be the key element in building the Asia SemiCon Hub, the largest semiconductor industrial park in the country which aimed to attract up to RM68bil in investments and create more than 500,000 new jobs over the next 30 years, said the source

Meanwhile, those with knowledge of the deal said there were chances that Green Packet might not want to take up the Silterra offer after December or January.
This was due to the emergence of newer semiconductor wafer plants in China that were looking at kicking off production in the second half of next year or by 2022

“If Khazanah doesn’t sell it before that, I don’t think they can get any buyers in the future

“This is the fourth time they are trying to sell Silterra and this will also be the last time, ” the source said

And the main reason why the first three deals did not go through was because the only buyers interested were foreign companies

“The lifting of the equity conditions in terms of foreign ownership is not within Khazanah’s authority

“Over the last three times when they wanted to sell Silterra, Mida also did not approve, because it felt that Siltera was a vital component of the whole E&E ecosystem up north, ” sources said, adding that without Silterra, it will put a dent on the country’s foreign direct investment (FDI)

The source also warned of a huge political issue if Silterra was sold to Foxconn, as its founder and chairman Terry Gou had run for Taiwanese presidency before

Gou moved quite a number of its Foxconn manufacturing plants from China to Vietnam in his 2019 presidential bid

“There is a potential political liability for Malaysia as a small country to stand between a potential conflict between Foxconn and mainland China

“If we let go of Silterra, a national strategic asset to Foxconn, it will kill the future of Silterra, ” sources said
















Green Packet past irregularties
The new bid by Green Packet in Siltera will be made through a RM500 million Private Equity Fund, BumiTech Fund. Is there really a Bumiputera participation in management and shareholder? 
Is the private fund purely a pass through entity or fund backed by Teraju? 
If it is Teraju backed, then an agency establised to assist Bumiputera should not be competing with genuine and capable Bumiputera entrepreneurs to merely name lending but offers no added value. It is an often heard complain of government and state agencies meant to assist Bumiputera entrepreneur from time immemorial.    
The issue of Bumiputera substantive involvement is more so now that Khazanah and the 10% to the SPV will be dormant partners that likely would or could be interested only in once a year annual report. Given time and opportunity, they could sell it out to even foreigners entirely

Second question on Green Packet is on their integrity. This takes us to a past report in Malaysia Reserve below:MACC investigates possible irregularities in P1 acquisitionMonday, July 1st, 2019 at , News
Under the 2014 deal, TM acquired a 57% stake in the wireless broadband service provider for RM350m
by AZREEN HANI / pic by ARIF KARTONO
THE Malaysian Anti-Corruption Commission (MACC) is investigating whether there are irregularities in Telekom Malaysia Bhd’s (TM) 2014 acquisition of wireless services company Packet One Networks (M) Sdn Bhd (P1). 
Under the deal, the government-linked company acquired a 57% stake in the wireless broadband service provider for RM350 million with a further RM210 million capital injection via newly issued redeemable bonds

Presently, TM owns 72.9% of the wireless operator — the brand name of which had undergone numerous changes from P1, to “webe”, and now to “unifi”. 
But the 2014 acquisition of the capital-intensive business has tailed TM’s profits. The telecommunications operator posted its first quarterly loss in 10 years during the third quarter of last year (3Q18), with impairment provisions ballooning to RM934 million including for assets related P1. 
Three sources confirmed with The Malaysian Reserve (TMR) that the visit by MACC officers to the telecommunications company on June 13 this year was related to P1 acquisition

TM had confirmed the visit by MACC officers to the company’s headquarters, stressing in an email reply to TMR that the visit was to “seek certain information”

One source told TMR that a few individuals are being probed over the half-billion ringgit deal for possible irregularities. But nobody has been charged for any wrongdoing. It is believed that the report to the MACC was recommended by the company’s board. 
TM in an emailed statement said: “We will continue extending our cooperation to the MACC as needed.” 
One of the sources said the inquiry into the P1 acquisition had delayed the appointment of a new CEO

The company had been without a permanent head for about a year after the resignation of MD/group CEO Datuk Seri Mohammed Shazalli Ramly. Some parties previously claimed that interference from Putrajaya had delayed the appointment of the CEO

Last month, the company announced the appointment of Datuk Noor Kamarul Anuar Nuruddin as its new MD, group CEO and ED, ending months of speculations on who would lead the telecommunications company. Imri Mokhtar was the acting CEO before Noor Kamarul’s appointment and will resume his role as the COO of the group

Rosli Man was appointed as chairman, effective Dec 3, 2018. He replaced Tan Sri Sulaiman Mahbob who resigned at the end of November 2018. Rosli, a seasoned practitioner in the sector, is seen as capable of steering the company out of its current rut

Khazanah Nasional Bhd is a substantial shareholder in the company. 
The lack of progress and improvement for P1 continues to raise alarm — especially regarding the technology rollout of 4G when the industry is moving towards 5G, said another source. 
Issues at TM saw the firm shedding over RM14 billion in market value after its share price dropped from a high of around RM5 in May to a 52-week low of RM2.11. It was also removed from the main constituent of the benchmark Bursa Malaysia. 
However, its share price has recovered — closing last Friday’s trading at RM4 and valuing the company at RM15.03 billion. 
Its net profit for the first three months of this year rose to RM308.28 million from RM157.15 million recorded a year ago, boosting the company’s prospects

But the company continues to feel the pressure to find a solution and resolve the issues faced by Streamyx customers. 
According to figures, there are 1.27 million Streamyx customers as at the end of last year and the company had upgraded 226,000 of these customers in areas covered by its fibre network

The government wants the company to find a solution to resolve the problem faced by these customers. But the capital expenditure to move these customers to a faster network will cost a hefty sum. 
P1 was a loss-making company of Green Packet and the valuation of the P1-Telekom deal is viewed as quite excessive. Quote from a 2014 Edge Online editorial:
P1 is a loss-making company — based on Green Packet’s broadband operational losses of RM117 million — but it is earnings before interest, tax, depreciation and amortisation (Ebitda) positive (financial year 2013 ended Dec 31 [FY13]: RM43 million) and generates Ebitda margin of 16%

The group’s broadband unit generates average revenue per user (ARPU) of RM86 (as of 4QFY13) versus TM UniFi’s (its broadband service) ARPU of RM185 and Streamyx’ ARPU of RM85

What we think could be the key rationale for the acquisition is as follows: First, the combination of P1’s 2.6GHz spectrum, which is suitable for high capacity traffic, and TM’s 2x5 MHz block in the 850MHz spectrum (lower spectrum entails much better frequency distance, which lowers capital expenditure for coverage) is a strong combination which gives it an advantage over incumbent cellular companies, which only have access to 1.8GHz and 2.6GHz spectrums for the 4G rollout

Secondly, if TM intends to get into the 4G game in a big way, P1’s 449,000 subscribers will give it a meaningful base to start with. Thirdly, TM may also have access to P1’s 1,908 sites for the roll-out of its 4G network; the majority of P1’s sites would be in key cities versus TM’s Code Division Multiple Access or CDMA sites in rural areas

But two key questions remain. First, the valuation of the deal, rumoured at an implied value of RM2 billion, is quite excessive. The second question is whether an acquisition of a stake is the most efficient way to gain access to P1’s spectrum

Who was the passenger in the deal? 
With such a questionable deal in the past, can Green Packet be expected to play such pivotal role for the local semiconductor industry or merely quick buck China man company

Reliable local and Bumiputera
With the local content, local shareholding structure, financing in place and technically capable outfit, Dnex present a more professional and reliable option as NST summarised below:   The proposal from DNeX and its strategic partner Beijing CGP Investment Co Ltd (Beijing CGP) was focused on planning and executing SilTerra's turnaround with a total investment of RM846 million, according to a source

On top of a RM136 million cash payment for Khazanah, DNex and its partner will absorb SilTerra's RM210 million bank borrowings, and inject a total of RM500 million for its capital and operating expenditures

Khazanah was not available for comment when contacted by last week

Meanwhile, sources said the condition of Silterra's present manufacturing licence would not be reviewed if SilTerra remains in the local hands

"SilTerra under DNex will be in capable Bumiputera hands with a Chinese giant as partner. If Green Packet is picked, SilTerra will still be in local hands but its founder (Puan Chan Cheong) will be second time lucky with Khazanah," they said, referring to Green Packet's disposal of its 57 per cent stake in Packet One Networks (M) Sdn Bhd to Khazanah's subsidiary Telekom Malaysia Bhd in 2014," they said

NST is saying Khazanah will be giving Green Packet another free ride again. Not mentioned is Green Packet will only flip the company to foreigners using the complicated corporate structure put in place to merely qualify for bidding. 
Perhaps, MACC should put this deal under its watch. 
Of late, key transactions and projects of GLCs and GLIC tend to favour non-Bumiputera companies when GLCs and GLICs by right should uphold their responsibilities to provide opportunities for Bumiputera companies. 
This trend can be seen in such transactions as FGV buying over non-Bumi plantations, EPF and SP Setia dealings, and recently proposed merger of Eco World and UEM Sunrise. 
Perikatan Nasional need to end this reverse discrimination against Bumiputera companies carried over from the Pakatan Harapan government. Just save the time and hustle, go for Dnex for genuine bumiputera, high integrity and ensured local benefit. 

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