Questionable deal regarding Time dotCom

ARCHIVES 2010
By admin-s

By Doc Jaz

Recently, TIME dotCom announced that it was acquiring a few companies (owned by Afzal Abdul Rahim).

This deal is highly questionable because we now have this 32-year old guy who ends up gaining RM91 million cash and RM435 million in TdC shares in exchange for the questionable nature of the transaction and valuation of his companies.

Most of the facts stated in the letter is obtained from Khazanah’s press releases and announcement to Bursa:

 

Recent Announcement

TdC announced on 15 Nov 2010 of its intentions to acquire the following companies:

• 100% of Global Transit Communications Sdn Bhd (GTC) for RM106 million (through issuance of 29.86 million TdC shares)
• 100% of Global Transit Ltd (Labuan) (GTL) for RM105 million (through issuance of 14.79 million TdC shares and cash payment of RM52.5 million)
• 100% of Global Transit Hong Kong Ltd and Global Transit Singapore Pte Ltd for RM1
• 100% of AIMS Group of companies for RM128 million (through issuance of 25.24 million TdC shares and cash payment of RM38.4 million)

All the acquisition targets mentioned above are controlled by Megawisra Sdn Bhd. TIME dotCom CEO, Afzal Abdul Rahim, is a major shareholder of Megawisra.

Khazanah gave away RM150m to GTI in exchange for a questionable IP transit business in 2008

In 2008, Khazanah made an announcement that effectively gave 11.64% of TdC to Global Transit International Sdn Bhd (GTI), in exchange for a questionable IP transit business (Global Transit Communications).

At that point in time, the JV deal was structured as follows:

• Khazanah injected its 30% shareholding of TdC into a special purpose vehicle Pulau Kapas Ventures. (PKV)
• GTI injected its 100% shareholding of GTC into PKV
• Khazanah would hold 61.2% of PKV, while GTI would own 38.8% of PKV.
• This effectively values GTC at roughly RM150million (based on TdC share price of RM0.31).
o The above calculation is based on TdC share price of RM0.31 per share in early October 2008 (just prior to the JV announcement).
o Calculation: The market value of Khazanah’s shareholding in TdC is RM236m. After structuring, Khazanah owns 61.2% of JV. This means that the JV should be worth roughly RM386m. This gives an implied value of RM150m for GTC.
o This is an awfully high price to pay for a company which reported a revenue of RM10.9 million and PBT of RM17k for year ending 31 Dec 2008
o Generally, GTC’s core business IP transit operates on very thin margins and should be definitely be worth much less than RM10m.

With that JV, Khazanah basically handed over RM150million to the shareholders of GTC (namely Afzal Abdul Rahim).

At the same time, Afzal was appointed CEO of TdC and was given an earn-out option to increase its stake in PKV/TdC.


Proposed acquisitions are over-valued, considering that the acquisitions may have either been window-dressed for acquisition or benefited from the relationship with TdC over the last 2 years

The related party transactions between TdC and GTC/GTL/AIMS is unclear. The obvious transactions are those that were announced for the period between 7 Oct 2008 and 3 Aug 2009, whereby TdC paid GTC and AIMS RM11.6 million for various services. However, there should be other transactions whereby TdC and GTC/GTI/AIMS are involved, but not announced, e.g. joint selling, sharing of common costs, product bundling, etc. Details of these are not made.

Despite that, it is clear that the performance of GTC, GTI and AIMS have improved significantly since 2008. See tables below:

1. GTC – summary of financials in RM million

                            9 mths till 30 Sep 2010              2009                 2008
Revenue                36.1                                            20.8                   10.9
PBT                       5.9                                             0.2                     0.02
PAT                       5.1                                             0.2                     -0.08

If GTC has indeed benefitted from related party transactions, one would have to question the rationale for the purchase consideration of RM106million. It would then appear that TdC is used to pump up the profit of GTC such that TdC would then have to pay a higher price for the acquisition of GTC.

2. GTL

GTL is a consortium member of a submarine cable system between Asia and US. It is not yet operating as the network was recently completed, hence there is no revenue thus far. Total investment in GTL by the shareholders to date is roughly USD12million–(the company has also accumulated debt of USD 17million). For a company that is not yet operating, and has invested only USD12 million (equivalent to RM37m), a purchase consideration of RM105 million by TdC is certainly very high.

3. AIMS Group – summary of financials in RM million

Total for the 3 AIMS companies, namely AIMS Asia Group, AIMS Data Centre 2 and AIMS Cyberjaya

                            9 mths till 30 Sep 2010              2009                 2008
Revenue                35.2                                            34.6                   26.6
PBT                       5.0                                             0.9                     -5.5
PAT                       4.2                                             -0.04                  -5.9 

Same argument as GTC. If there was indeed related party transactions that benefitted AIMS Group, then why should TdC shareholders be paying a high price for a company which it helped make profitable.

Furthermore, if these companies have strong underlying business potential, then why did Khazanah/TdC acquire these companies 2 years ago? One would have to then question the business acumen of the Khazanah management.

By right, Khazanah/TdC should not even need to acquire these companies 2 years ago. TdC would be in a much better position to venture into these businesses by themselves. With their fiber assets and Khazanah’s capital backing, they would certainly be able to do a much better job than the 30-year old Afzal.

With all these questionable JV, acquisitions and deals over the last 2 years, Afzal ends up with RM91 million cash and RM435 million in TdC shares (RM293m for GTC through PKV + RM142 million for GTL and AIMS). All this in exchange for a companies with a combined paid up capital of RM43 million and profit after tax of RM12 million (2010, adjusted for full 12 months).



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